All Hail Palantir, the King of Useful AI

There are those who doubt the usefulness, or at least the rapid monetization of, generative artificial intelligence on the software side. These folks see the large increase in capital expenditures at these companies and wonder, perhaps quite correctly, if this investment will pay off and when. These folks are not out of their minds to think in this way. Several of the "Mag 7" stocks, already "cloud kings" every one of them, have drawn up a less than direct path from here to there when it comes to AI.

Then there are those who see Palantir Technologies PLTR, and the leadership of CEO Alex Karp, who knows precisely where to take Palantir and who sees exactly why those in need of secure, big data-driven AI services should seek out his company. He is different. In a Satya Nadella (CEO of Microsoft MSFT)-kind of way. By that, I mean that one or two weeks in, you are aware that this is someone special, and someone capable of greatness. Palantir reported on Monday evening. Let's check out the digits...

The Quarter

Palantir posted an adjusted earnings per share of $0.09 (GAAP EPS: $0.06) on revenue of $678.134 million. These top- and bottom-line results both beat Wall Street's expectations, while the revenue number reflected year-over-year growth of 27.2%. This was an acceleration out of the high-teens, low twenties range that Palantir had been growing sales at for most of the past year. The adjustment of three cents per share was made primarily for the purpose of stock-based compensation.

Customer count grew 41% year over year, as the company closed 27 deals worth more than $10 million. U.S. commercial revenue popped for growth of 55% to $159 million as U.S. commercial customer count grew 83% to 295. U.S. commercial remaining deal value grew 103%. U.S. government revenue increased 24% to $278 million. Overall commercial revenue grew 33% to $307 million, while overall government revenue grew 23% to $371 million.

Operations

As revenue was growing 27.2% to $678.134 million, the cost of that revenue increased 20.3% to $128.562 million, leaving gross profit of $549.572 million (+28.8%) on a gross margin of 81%, up from 79.9%. Operating expenses grew 6.7% to $444.233 million. leaving operating income of $105.339 million, up from $10.074 million for the year-ago comparison. This takes the unadjusted operating margin up to 15.5% from 1.9%.

After accounting for interest, other income and losses and taxes, and income due non-controlling interests, net income attributable to common shareholders printed at $134.126 million, up from $27.127 million. That works out to an EPS of $0.06 per diluted share, up from the year ago comp of $0.01.

CEO Alex Karp Writes Home

From his quarterly letter to shareholders:

"Our growth across the commercial and government markets has been driven by an unrelenting wave of demand from customers for artificial intelligence systems that go beyond the merely performative and academic."

"The language models that have captured our collective attention have an ability to approximate truth. They are incredibly capable probabilistic engines that nonetheless have little innate sense of north or south and struggle on their own to solve complex analytical problems. Such models are necessary but not sufficient. Something more is required. They are wild animals, whose power and capabilities must be tamed and harnessed. And we are now seeing what is possible once they are."

"The terrain for every institution in the world that seeks to survive has shifted as a result of the arrival of large language models and their capabilities. And our partners in the United States have been by far the quickest to adjust. The incorporation and deployment of large language models will be one of the most telling proxy indicators of national outperformance moving forward. Whether other countries in the world adapt in a similar way will be a measure of their vitality and competence."

Guidance Ahead

For the current quarter. Palantir is projecting total revenue of $697 million to $701 million, which is well ahead of the $679 million that Wall Street had in mind. At the midpoint that would be good for annual growth of 25.2%. The company sees an adjusted operating income of $233 million to $237 million for the period.

For the full year, Palantir increased revenue guidance to $2.742 billion to $2.75 billion. Wall Street was down around $2.7 billion for this number, so this is another beat. The company now expects U.S. commercial revenue to grow at least 47% to at least $672 million. Palantir sees adjusted operating income of $966 million to $974 million. In addition, the company continues to see unadjusted operating and net income profitability and sees free cash flow of between $800 million and $1 billion.

Solid Fundamentals

For the first six months of the fiscal year, Palantir has generated operating cash flow of $273.766 million. Out of that number, the company spent $5.543 million on capital expenditures and $29.071 million on cash paid for payroll taxes related to stock-based compensation. That left free cash flow of $297.94 million for a free cash flow margin of 23%. It did repurchase $26.699 million worth of its own common stock and does not pay shareholders a cash dividend.

Now, for Palantir's balance sheet, which is always a pleasure to look at due to the quality of its construction. Palantir ended the quarter with a cash position of $3.999 billion and current assets of $4.776 billion. Current liabilities add up to $806.9 million including no short-term debt, but $278.4 million in deferred revenue which is not a true financial liability. This brings the company's current to a beefy 5.92 at the headline. Once adjusted for those unearned revenues, that current ratio rises to an absolutely beastly 9.03. Go ahead and let out your guttural roar. I know you want to after seeing such a pristine current situation.

Total assets amount to $5.192 billion, which much to the Palantir's credit, includes nothing intangible. Total liabilities less equity comes to $1.054 billion, which of course includes no long-term debt. What here among the fundamental data is not impressive? Absolutely nothing. To call this a fortress-like balance sheet would be to underrate its strength.

Wall Street's Take

So far, I have only found five highly rated analysts who have weighed in on PLTR since these earnings were released last night. In general, Wall Street still does not get what is going on here. If I broaden my parameters out a bit and let poorly rated analysts such as Louie DiPalma of William Blair and Brent Thill of Jefferies in, the scales would be even more imbalanced.

Among the five, we have three "Sell" or sell-equivalent ratings, one "Hold" rating and one "Buy" rating. The average target price across the five is $25, with a high of $38 (Dan Ives of Wedbush) and a low of $18 (Brian White of Monness). Omitting those two as potential outliers brings the average target across the other three to $23.

Readers should be aware that although Brian White is a good analyst (5-star rating by TipRanks), he has literally been consistently incorrect on PLTR for three years running.

Something Negative

A little something for the bears to cling to, early this morning, Palantir filed a prospectus related to the offer and sale of securities. The filing reads "We or selling security holders may offer or sell Class A common stock, preferred stock, depository shares, debt securities, warrants, subscription rights, purchase contracts and units in one of more offerings and in any combination." In short, the firm may or may not dilute the equity if they feel the need to. Something for the perma-bears to hope for.

My Take

What a quarter. I don't see how an analyst, who most of whom you and I have simply obliterated performance-wise in this name, could take in the quarter, the guidance, and the fundamentals and find anything negative. I guess valuation is all they have. The stock trades at 76-times forward looking earnings. I see a reason behind that. Demand and improving margins. They must not see that. By the way, I added another 25% to my long position Sunday night into Monday morning. That makes PLTR my seventh largest long position in terms of weighting.

That guidance is terrific, the cash flows are impressive, and that balance sheet is almost one of a kind. It's a work of art. It will be sometime until I get off of the Palantir bandwagon. Don't forget. I have been on this wagon since the stock traded in the mid-single digits. I'm not going anywhere.

Readers will see that PLTR has traded inside of an ascending price channel since early May 2023. From early March on, the stock developed a cup with handle pattern within the price channel, with a $30 pivot. 

Readers will see that the lower end of the channel was tested on Monday as the handle was completed. The stock now tries to take back its 50-day simple moving average as its Relative Strength Index returns to neutral and a bearish looking daily Moving Average Convergence Divergence Oscillator attempts to curl the 12-day exponential moving average back toward the 26-day EMA.

Palantir Strategy

Target Price: $36 up from $32

Pivot: $30 (up from $26)

Add: Down to the 200-day SMA (currently $21.63)

Panic: Loss of the 200-day SMA.

At the time of publication, Guilfoyle was long PLTR, MSFT equity.