Palantir Has A Head Start In AI Race, Buy On Recent Strength (NYSE:PLTR)

Over the previous few months, one issue above all has pushed the rebound in tech shares: enthusiasm for AI. As ChatGPT continues to get pleasure from speedy early adoption, many tech firms are leaping on the AI bandwagon to reveal what generative AI and pure language fashions can improve on their tech platforms.

Palantir (NYSE:PLTR), nevertheless, is just not a mere bandwagoner on this development. The corporate’s massive knowledge and machine studying software program has been constructed on this basis for years, and the corporate is simply now beginning to monetize AI as its personal product separate of Gotham and Foundry. Constructing off enthusiasm for Palantir’s potential within the AI period in addition to the corporate’s present robust execution in a tricky macro atmosphere, shares of Palantir have greater than doubled yr up to now.

Palantir’s bull case shines with AIP

I am nonetheless bullish on Palantir inventory and proceed to carry onto the inventory in my portfolio, even after the speedy rebound over the previous few months. It is price highlighting the corporate’s early launch of its new AIP (Synthetic Intelligence Platform), accessible now to pick clients in each the private and non-private sector segments.

Writing on the rollout of AIP within the Q1 shareholder letter, CEO Alex Karp wrote as follows:

The primary iteration of the platform will probably be made accessible to pick clients this month. Now we have already had a whole bunch of conversations with potential clients about deploying the software program and are at the moment negotiating phrases and pricing for entry to the elements of the platform.”

Briefly, this know-how will enable Palantir’s clients to leverage AI on their very own databases – giving them the flexibility to create AI brokers that may automate and set off enterprise processes.

And as a refresher, on prime of AI, right here is my full long-term bull case on Palantir:

• Huge knowledge is an enormous self-discipline that may be utilized in almost limitless methods, together with as AI functions. Palantir is not a software program firm that serves just one or a restricted set of use instances. Information and inferences that may be constructed from knowledge are prevalent in nearly all the things: which explains why Palantir is such a robust software for each private and non-private sector purchasers. Huge knowledge can be the feeder to AI, as the 2 work hand in hand.
• Development at scale. Regardless of being at a $2+ billion annual income scale, Palantir continues to ship high-teens income progress. Few firms are capable of obtain this type of progress at scale, and it is a testomony to the large applicability of Palantir’s merchandise and the humongous clientele it has drawn (specifically, the U.S. Military). Previous to the current authorities spending slowdown, Palantir had forecasted >30% y/y progress via 2025 (which can nonetheless be possible when macro situations flip round).
• Stepping up go-to-market momentum. Palantir is chasing progress throughout all kinds of channels. The corporate has stepped up its gross sales hiring, a nod on the broad market alternative it has and the necessity for extra territory protection. Palantir additionally has deepened relationships with ISVs (built-in service distributors) that may resell Palantir’s merchandise with out its involvement and provide further protection that Palantir’s direct gross sales drive cannot deal with.
• One foot within the public sector, one foot in non-public. Palantir made its title on being a big federal authorities contractor, however its merchandise are simply as compelling to an enterprise phase that’s rising ever extra obsessive about the worth of huge knowledge. Most software program firms begin off as primarily coping with enterprise patrons, after which hopefully getting FedRAMP certification to promote into public sector purchasers later. Palantir did the reverse: however now, its momentum with Fortune 100 firms is continuous to develop, and buyer provides are persevering with to development at a formidable tempo. The newest product rollouts like AI are being bought concurrently to each authorities and personal sector purchasers.
• Free money stream and GAAP profitability. Palantir simply crossed the brink into GAAP profitability and continues to generate wholesome free money stream, which suggests the enterprise is self-financing (a departure from many different rapid-growth software program firms that proceed to want to lift capital to finance their losses).

Valuation replace

After all, Palantir’s current rally has made the inventory costly (once more). Despite this, I proceed to see additional upside right here.

At present share costs close to $14 (off from the month’s highs round $16), Palantir trades at a market cap of $29.74 billion. After we web off the $2.91 billion of money off Palantir’s most up-to-date stability sheet (the corporate’s has an unused revolver nearing $1 billion in capability, however is at the moment undrawn), the corporate’s ensuing enterprise worth is $26.83 billion.

For the present fiscal yr, Palantir is guiding to $2.185-$2.235 billion in income, representing 15-17% y/y progress:

And for FY24, Wall Road consensus is pegging Palantir’s income at $2.62 billion, representing 19% y/y progress – to me, acceleration is believable contemplating macro headwinds in 2023 and potential tailwinds from the rollout of AIP.

This places Palantir’s valuation multiples at:

• 12.2x EV/FY23 income, based mostly on the midpoint of the corporate’s income steerage vary
• 10.2x EV/FY24 income, based mostly on consensus expectations

I proceed to imagine in additional upside for Palantir via year-end. My December 2023 value goal for the corporate is $17, representing 12.5x EV/FY24 income and ~21% upside from present ranges.

Q1 obtain

Despite macro headwinds which have disproportionally impacted massive advanced software program merchandise like Palantir that require prolonged integrations, the corporate has held up properly versus expectations. Check out the Q1 earnings abstract under:

Palantir’s income grew 18% y/y to $525.2 million within the quarter, forward of Wall Road’s expectations of $506.0 million (+13% y/y) by a significant five-point margin, in addition to accelerating barely over This autumn’s 17% y/y progress tempo. In 1 / 4 the place most software program firms have reported macro-based slowdowns, this outperformance is really significant.

Business/non-public sector momentum continues to be a serious driver for Palantir – and it is vital to notice that this enterprise continues to be fairly nascent. The corporate added 20 net-new clients within the quarter to land at 280 whole industrial purchasers, whereas industrial income grew 15% y/y to $236 million (or 45% of the corporate’s whole). Authorities income at 20% y/y progress outpaced each the corporate income and industrial income, as authorities purchasers are doubtless much less reactive to slicing spend amid powerful instances.

Billings of $614 million, nevertheless, is an encouraging metric – including $89 million of deferred income and up 25% y/y, indicating that potential acceleration could also be underway.

Right here is additional commentary on the corporate’s top-line momentum from Chief Income Officer Ryan Taylor’s remarks on the Q1 earnings name:

These robust outcomes had been pushed primarily by the re-acceleration of our U.S. industrial enterprise, which surpassed the $100 million income threshold for the primary time with 26% year-over-year progress.

We proceed to see sturdy pilot begins and promising conversions and we’re additionally starting to see the conclusion of our growth technique, that means we’re starting to see significant progress and upsell alternatives with our newer buyer base.

Some notable examples embrace the growth of our work with Hertz, who’s utilizing Foundry to extra effectively handle and function its fleet of almost 500,000 automobiles; and Jacobs Engineering, who’s doubling down on our partnership to cut back price and enhance efficiency throughout vegetation. We additionally signed vital growth agreements with the most important well being system within the nation for continued acceleration of our hospital operations efforts, and with one of many world’s largest paper and packaging firms.

Our U.S. industrial buyer base, which stood at 155 on the finish of Q1 2023, a seven-fold enhance in buyer rely over simply two years, presents an immense alternative for continued growth.”

High-line energy additionally flowed down into profitability. After breaking via to constructive GAAP web earnings for the primary time in This autumn (This autumn was benefited by favorable OI&E to bridge damaging working earnings into constructive GAAP web earnings), Palantir additionally generated its first-ever constructive GAAP working earnings this quarter in Q1:

Palantir’s steerage additionally continues to name for constructive GAAP web earnings in each quarter of FY23.

Key takeaways

Palantir is a purchase on current energy. The enterprise has seen unimaginable momentum in a difficult macro atmosphere, and with potential tailwinds within the wings from its new AI Platform, there are robust drivers in place for re-acceleration in progress in FY24. Keep lengthy right here.