Artificial Intelligence (AI) has been the buzzword of Wall Street this year. The AI-driven rally has propelled the Nasdaq Composite by 33.7% year-to-date. Palantir Technologies Inc. (PLTR) has also ridden this AI wave, returning more than 180% year-to-date.
Earlier this year, PLTR announced the launch of its newest offering, Artificial Intelligence Platform (AIP), for enterprise and military applications. AIP combines the capabilities of large language models (LLMs) like OpenAI’s GPT-4 or Google’s BERT with their proprietary software to enable responsible, effective, and compliant AI advantages for defense organizations and enterprise customers.
Commenting on AIP, PLTR’s CEO and Co-Founder Alex Karp said, “AIP will allow customers to leverage the power of our existing machine learning technologies alongside…large language models, directly in our existing platforms.” In a letter to shareholders, Karp said AIP has users in over 100 organizations, including the healthcare and automotive industries, and PLTR was in talks with more than 300 additional companies.
PLTR failed to surpass the consensus earnings and revenue estimates for the second quarter. Its EPS almost aligned with the analyst estimates, while its revenue missed the consensus revenue estimate marginally. In an interview at Bloomberg, PLTR CEO Karp stated, “We have a good chance at becoming the most important software company in the world.” He said that “demand is unprecedented” for its AI platform, AIP.
For the third quarter, PLTR expects its revenue to be between $553 million and $557 million. Its adjusted income from operations is expected to be between $135 million and $139 million. For fiscal 2023, the company raised its revenue guidance. Its revenue for the year is now expected to exceed $2.21 billion. However, the latest revenue outlook for fiscal 2023 is at the midpoint of analyst expectations of between $2.19 billion and $2.24 billion.
PLTR also raised its adjusted income from operations guidance to more than $576 million. Moreover, PLTR’s Board of Directors authorized a stock repurchase program of up to $1 billion based on what the company called “transformative” traction for its AI technology.
Commenting on its second-quarter performance, RBC Capital Markets analyst Rishi Jaluria said, “Given the heightened expectations of the stock from the retail investor base around Palantir being an AI beneficiary, these are kind of disappointing numbers.” Jaluria believes that PLTR is not truly a generative AI company, and it does not have anything truly differentiated when it comes to generative AI.
He said, “This really feels like the same Palantir services and technology that they’ve been selling, which has its value. They’re not actually adding a tremendous amount of value to be a leader in generative AI, even though they are positioning themselves as such in front of the investment community and even in front of CIOs and CEOs.” He has an underperform rating on the stock and a price target of $5.
However, Wedbush analyst Dan Ives is bullish on PLTR’s AI prospects. He stated, “That’s probably the best pure-play AI name, in terms of them monetizing not just on the government side, but on the enterprise side when it comes to AI.” Wedbush maintained an outperform rating on the stock with a price target of $25.
Jefferies analyst Brent Thill believes there are several unknowns in PLTR’s business. He considers that the timing recovery of its U.S. government business, its U.S. commercial growth's durability, and its AI platform's pricing strategy could cause near-term choppiness in the financials. He has a hold rating on the stock with a price target of $17.
Here’s what could influence PLTR’s performance in the upcoming months:
Robust Financials
PLTR’s revenue for the second quarter ended June 30, 2023, increased 12.7% year-over-year to $533.32 million. Its adjusted income from operations rose 25.2% over the prior-year quarter to $135.04 million. The company’s adjusted free cash flow increased 57.7% year-over-year to $96.03 million. Its adjusted EBITDA rose 27.2% over the prior-year quarter to $143.43 million.
In addition, its adjusted net income attributable to common stockholders came in at $119.55 million, compared to an adjusted net loss attributable to common stockholders of $21.12 million. Also, its adjusted EPS came in at $0.05, compared to an adjusted loss per share of $0.01 in the prior-year quarter.
Favorable Analyst Estimates
Analysts expect PLTR’s EPS for fiscal 2023 and 2024 to increase 300% and 7.3% year-over-year to $0.24 and $0.26. Its fiscal 2023 and 2024 revenue is expected to increase 16% and 18.9% year-over-year to $2.21 billion and $2.63 billion.
Its EPS and revenue for the quarter ending September 30, 2023, to increase 500% and 17.1% year-over-year to $0.06 and $559.37 million, respectively.
Stretched Valuation
In terms of forward EV/EBITDA, PLTR’s 60.82x is 300.3% higher than the 15.19x industry average. Likewise, its 16.08x forward EV/S is 454.1% higher than the 2.90x industry average. Its 74.96x forward non-GAAP P/E is 220.9% higher than the 23.36x industry average.
Mixed Profitability
In terms of the trailing-12-month gross profit margin, PLTR’s 78.75% is 63.4% higher than the 48.20% industry average. Likewise, its 21.35% trailing-12-month levered FCF margin is 193.3% higher than the industry average of 7.28%.
PLTR’s trailing-12-month net income margin is negative 12.87% compared to the 2.01% industry average. Likewise, its trailing-12-month Return on Common Equity is negative 10.04% compared to the 0.23% industry average. Furthermore, the stock’s negative 5.93% trailing-12-month EBIT margin compares to the industry average of 4.48%.
Solid Historical Growth
PLTR’s revenue grew at a CAGR of 34.8% over the past three years. Its total assets grew at a CAGR of 29.5% over the past three years. Moreover, its levered FCF grew at a CAGR of 88.5% over the past three years.
Bottom Line
The buzz around artificial intelligence has helped PLTR skyrocket this year. Its recently launched platform, AIP, is garnering attention as it will allow enterprises and defense and military organizations to integrate large language models (LLMs) with machine learning and AI to aid decision-making. AIP was launched with no pricing strategy, and according to PLTR’s CEO, it is aimed to “just take the whole market.”
The company told analysts that its new AI-related pilot programs are underway, but it’s still being determined when these programs will generate revenues. Without a revenue-generating timeline from its AIP platform, PLTR could witness investor interest in its AI platform fading slowly. On the other hand, the stock trades at an expensive valuation.
Given its mixed profitability, it could be wise to wait for a better entry point in the stock.
