Palantir Price Target After ‘Otherworldly’ Surge
The AI darling has one of the strongest balance sheets seen in four decades.
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On Monday evening, AI-driven, big-data focused, tech darling Palantir Technologies (PLTR) released the firm’s second quarter financial results.
To say that Palantir hit the ball out of the park would be putting it mildly. For the period ending June 30, Palantir posted a GAAP and an adjusted EPS of $0.41 on revenue of $1.935 billion. These top- and bottom-line results both easily beat Wall Street’s expectations while that sales print was good for year-over-year growth of 93%. The quarter wound up being the 12th consecutive reporting period where Palantir sales growth accelerated on an annual basis.
For the second quarter, U.S.-driven revenue grew 115% annually and 23% sequentially to $1.573 billion. Within that number, U.S. commercial driven sales increased 149% annually and 28% sequentially to $764 million, while U.S. government driven sales increased 90% annually and 18% sequentially to $809 million. During the quarter, the firm closed 220 deals valued at $1 million or more, 98 deals worth $5 million or more and 73 deals worth $10 million or more. On top of all of that, U.S. commercial remaining deal value currently runs at $6.238 billion (+124% year over year, +27% quarter over quarter), so the gravy train is not about to screech to a halt.
The CEO
The aways colorful and often interesting co-founder and CEO Alex Karp commented in the press conference:
“Demand for AI sovereignty has now been unleashed. And Palantir is the only company that has demonstrated it can transform tokens into actual economic value. Our customers trust us to provide them with maximal control over their operations, data, and decisions. Their competitive advantage should never become the training data for future models. This quarter was otherworldly: our U.S. commercial revenue grew 149% year-over-year, our overall revenue grew 93% year-over-year, and our Rule of 40 score climbed to 155%.”
For those wondering but were afraid to ask, the “Rule of 40” is a popular financial health test for growth-type companies stating that a firm’s combined annual revenue growth rate and profit margin should add up to 40% or more. Scoring 40 or more pretty much validates elevated valuations for investors in this type of company. Let that sink in. Scoring 40 is kicking some tail for growth stocks. Palantir scored a 155. Palantir is still the king.
I love this quote, which I lifted from Karp’s letter to shareholders:
“While our U.S. commercial business is on fire, we believe it is nonetheless just nascent.”
Operations
While Palantir was growing sales 93% to $1.935 billion, the cost of that revenue increased 53.9% to $296.87 million. That left a gross profit of $1.639 billion (+102.1%) as gross margin improved to 84.7% from 80.8%. Total operating expenses grew 34.2% to $726.59 million, leaving GAAP operating income of $912.004 million (+238.6%) as GAAP operating margin improved all the way from 26.8% to a jaw dropping 47.1%.
After accounting for interest, other income and expenses and taxes, GAAP net income attributable to shareholders printed at $1.062 billion (+224.7%). This works out to $0.41 per fully diluted share, up from the year-ago comp of $0.13. After adjusting for stock-based compensation as well as income tax effects and related adjustments, EPS still printed at $0.41, up from $0.16 a year ago.
Guidance
For the current quarter, Palantir sees revenue of $2.16 billion to $2.164 billion, bringing the low end of the range well above the $2 billion that Wall Street had in mind. The firm also sees Q3 adjusted operating income of $1.292 billion to $1.296 billion.
For the full fiscal year, Palantir is projecting total revenue of $8.15 billion to $8.158 billion, again bringing the lower end of the range far above the $7.72 billion that Wall Street was looking for. Adjusted operating income is seen at $4.889 billion to $4.897 billion and U.S. commercial revenue is seen in excess of $3.424 billion. The firm is projecting free cash flow for the full year of $4.5 billion to $4.7 billion.
Fundamentals
For the quarter reported, Palantir generated operating cash flow of $1.216 billion (+125.6%). Out of that came capex spending of $14.554 million but added in are payroll taxes related to stock-based compensation of $18.746 million. That left free cash flow of $1.22 billion (+114.4%). The firm does not return capital to shareholders.
Turning to the balance sheet, Palantir ended the period with a cash position of $9.409 billion leading to current assets of $11.1 billion. Current liabilities add up to $1.536 billion. This includes no short-term debt but does include deferred revenue of $579.437 million (which is not a true financial obligation). That places the firm’s current ratio at a muscular 7.23. Adjusted for those deferred revenues, this ratio rises to an incredible 11.59. Remember, 1.0 is considered adequate. 2.0-plus is considered excellent. This is 11.59.
Total assets amount to $11.679 billion. This includes no entries for intangibles, which is nice. Total liabilities less equity comes to $1.794 billion. Simply put, Palantir may have the cleanest balance sheet in America. This is definitely one of the strongest balance sheets I have seen in almost 40 years on Wall Street.
Opinion
What’s not to like? The U.S. government business is hot. The U.S. commercial business is even hotter. Profits and margins are soaring. Cash flows are more than robust. The balance sheet is fortress-like. This balance sheet includes no debt on the liability side and none of the intangibles on the asset side that so many firms use to make things “work” or seem stronger. I keep expecting someone to step up and compete effectively against Palantir in the data-driven, AI-focused, intelligence game, but so far, no one even comes close.
Readers will see that Palantir is blasting out of an inverse head-and-shoulders pattern of bullish reversal on Tuesday morning. The pattern, in my opinion, bears a $134 pivot. Relative strength will pop on the opening bell as will all three components of the daily MACD. I am quite glad that I got my broader Sarge-folio back in this name ahead of earnings. To my chagrin, I exited this name at poorly executed prices for the “$10K Portfolio.”
Palantir Technologies (PLTR)
Target Price: $181
Pivot $134
Add: Down to 50-day SMA (currently $130)
Panic: Loss of June low of $106
At the time of publication, Guilfoyle was long PLTR equity.
