Despite big gains, Palantir Stock (NYSE:PLTR) still deserves more love

By | February 24, 2024

Palantir Technologies (NYSE:PLTR) Share prices are up almost 192% in the past twelve months. Still, Palantir’s stock deserves more love as the company’s AI business gains traction amid favorable macroeconomic trends. The company’s aggressive expansion into commercial capabilities is likely to accelerate revenue growth and pave the way for robust earnings growth. I’m bullish on Palantir because there is compelling evidence that the company is just getting started.

Commercial expansion is gaining momentum

In the fourth quarter of 2023, commercial revenues grew 32% year-over-year (year-over-year) to $284 million, while government segment revenues grew 11% year-over-year to $324 million. While the Government segment still accounts for the majority of revenue, the Commercial segment continues to grow at a much higher pace, indicating the strong momentum behind this business segment. This tremendous growth comes thanks to the success of the AI ​​integration platform.

Artificial Intelligence Platform (AIP) ‘bootcamps’ are proving effective in increasing the company’s addressable market opportunities. After setting a goal of conducting 500 AIP bootcamps within a year in October, the company has already hosted 560 bootcamps involving 465 organizations.

According to company management, these bootcamps have already helped Palantir shorten sales cycles and accelerate customer acquisition. In the fourth quarter of 2023, the company reported a doubling of new U.S. commercial deals valued at more than $1 million compared to the fourth quarter of 2022.

To drive commercial sales growth internationally, the company has resorted to establishing strategic partnerships. For example, Palantir has partnered with Fujitsu to expand its reach in Japan, allowing the company to bring AIP and data integration capabilities to a new geographic location. Another example is the company’s partnership with SOMPO Care, a leading health insurer in Japan, to provide real-time data to nursing homes and elderly care facilities.

Palantir focuses on developing industry-specific solutions to drive the growth of this segment as well. In the automotive sector, for example, Palantir targets electrical systems manufacturers to help them optimize production. In the manufacturing sector, the company is developing AI-powered disruption management applications to help companies save millions of dollars in losses due to the potential disruption to business operations.

In addition to these sectors, Palantir is expanding into the healthcare, retail and financial services sectors through strategic partnerships to expand its footprint.

Investments are paying off

Palantir has been investing heavily in developing robust platforms and customer acquisition for years. Today the company is reaping the benefits of these investments. The fourth quarter of 2023 marked the fifth consecutive quarter of profitability for Palantir. From a net loss of $124 million in the second quarter of 2022, the company has come a long way to reporting a net profit of $93.4 million in the fourth quarter of 2023. Palantir’s growing profitability is a testament to the company’s scalable business model.

A closer look at AIP’s recent success shows that this was possible thanks to the massive investments the company has made in developing its core platforms, Foundry and Gotham. AIP essentially brings the power of these two platforms into a more accessible, commercially viable form.

The company’s close relationship with governments – enabled by substantial investments in its core products – has served it well in attracting large-scale enterprise customers in the recent past. Palantir’s expertise in operating software at leading government agencies helps the company deploy commercial software in challenging environments, which can prove to be a strong competitive advantage in the long term.

Palantir has historically spent large amounts of money integrating large language models and other AI components into its product suite, which is proving to be a differentiator today.

Palantir’s Improving Margins

In the fourth quarter, Palantir’s adjusted operating margin was 34%, a substantial improvement from just 22.5% a year ago. Free cash flow margin also improved to 50%, indicating strong operating efficiency and the company’s ability to convert revenues into cash.

A deep dive into Palantir’s recent financial performance reveals several reasons behind the continued improvement in margins. The growth of the commercial sector, which has contracts with higher margins than those of the government, is a major reason behind the margin expansion. In addition, economies of scale and the company’s focus on responsible growth have also played an important role in driving margin growth.

Overall, Palantir appears well positioned for further margin expansion thanks to its growing revenue contribution from the commercial segment. This should allow the company to report record free cash flow in 2024, potentially boosting the stock price.

Is Palantir a Buy According to Wall Street Analysts?

In early February, PLTR shares rose more than 20% after strong fourth-quarter 2023 earnings results, resulting in a notable increase in valuation multiples. This forced HSBC analyst Stephen Bersey to downgrade Palantir while maintaining a $22 price target. The analyst acknowledged in a letter to clients the positive developments on the US commercial front and the better-than-expected success of API bootcamps.

Jefferies analyst Brent Thill also struck a bearish tone in January, claiming that AI is overhyped today. In summary, he believes that Palantir’s valuation has already risen to unsustainable levels.

Wall Street consensus estimates reflect this pessimism. Based on the ratings of thirteen Wall Street analysts, Palantir’s average price target is $18.55, implying a 19.5% downside risk from the current market price. Overall, the stock has a consensus rating of Hold.

Nevertheless, despite the increase in valuation multiples, there is no hiding the fact that Palantir still has a long way to grow. Continued growth in revenue, net income and free cash flow will support higher share prices in the long term.

The takeaway: Palantir isn’t cheap, but it’s still attractive

Amid the rapid growth of the commercial sector, Palantir is well positioned to reach new financial highs in 2024. The company is likely to emerge as a big winner in the growing adoption of AI across business sectors. Although analysts believe the valuation is high, Palantir shares are likely to trade at much higher prices in the long term if earnings growth accelerates.

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