Palantir: Get Set, Go

Summary

• Palantir will be reporting its Q1 results on 11 May, 2021.
• Its customer growth, stock-compensation expenses, hiring plans, Q2 revenue guidance and total remaining deal value will be in focus.
• Investors may want to remain invested in Palantir heading into earnings.

Photo by Sundry Photography/iStock Editorial via Getty Images

All eyes will be on Palantir (NYSE:PLTR) when it reports its Q1 results on Tuesday next week. Investors would be curious to see if the company can post yet another revenue beat. But in addition to tracking its top line figure, investors may also want to monitor its customer traction metrics, its hiring plans for the sales process and its management’s guidance for the next quarter. These items will highlight the company’s near-term growth prospects and are likely to have bearing on its shares in the coming days and weeks.

Customer Traction and Initiatives

Let me start by saying that fellow SA contributor, Investi Analyst, has already written a comprehensive earnings preview article on Palantir. However, in this article, I’ll attempt to take the analysis a step further and we’ll discuss several key items required to properly assess Palantir’s Q1 results, that might not have been discussed elsewhere.

A key parameter, and yet an often-overlooked item, when analyzing Palantir’s prospects, is its total remaining deal value. It’s basically the aggregate dollar value of deals that the company has signed, that are yet to be wholly or partially delivered. One can argue that it’s akin to the backlog metric which encompasses several kinds of contracts.

For the record, its total remaining deal value stood at $2.8 billion for funded contracts (excluding IDIQ or indefinite delivery/indefinite quantity contracts) at the end of Q4 FY20. From an investor’s standpoint, a significant growth in this figure would point to growing customer traction, indicate that Palantir was successful in securing several new contracts/deals in Q1 and suggest that its revenue growth momentum may remain intact or accelerate going forward. Conversely, a muted or a declining remaining deal value figure would suggest that Palantir is losing its customer appeal, or that it faced operational setbacks which got in the way of securing new contracts/deals, and it would present the distinct possibility of an impending revenue growth slowdown.

(Source: BusinessQuant.com, company filing)

Therefore, I encourage readers to track Palantir’s remaining deal value in its upcoming Q1 earnings report. It would provide us with some clarity and give us a sense about Palantir's future revenue collections.

Next, a major issue with Palantir so far has been that its customer base hasn’t materially grown over the recent quarters. In fact, the company had 139 customers at the end of the last quarter. It has actually managed to add just 14 customers in the last two quarters and just 7 customers in the last quarter. This has fueled concerns that the data analytics firm is excessively relying on its existing and long-standing customers to drive revenue growth and that its platforms aren’t all that useful or lucrative to attract new customers.

(Source: BusinessQuant.com, company filings)

Now, Palantir is making efforts to address this issue – by switching to a customer friendly payment model and by offering its platforms for free to major companies in key industries. But having said that, readers and investors should monitor Palantir’s tangible progress on this front and monitor its customer count figures in its next 10Q filing. I think it’s needless to say that a significant growth in its customer count would dispel such concerns and, more importantly, point to increasing customer traction. However, given the generally long nature of its B2B sales conversion cycles and COVID-19 still rampant in several major markets, I expect muted customer growth in Q1.

Initiatives for FY21

Another point of discussion amongst Palantir bulls is its announcement to revamp its sales force. I’ve already covered this development and its ramifications in a prior article so we won’t be covering the same points again. But the crux of it all is that Palantir’s management expects to add triple digit headcount for its sales function this year.

While adding new sales personnel is usually a precursor for sales acceleration, things are not so straightforward in Palantir’s case. For starters, we don’t know if these are going to be full-time employees with a fixed overhead. Second, the word “triple digit” is open to interpretation and could vary from 100 to 999. The company disclosed in its last 10K filing that it had 2,439 full-time employees so, in theory, it could be expanding its total full-time headcount anywhere between 4% and 41%. That’s a really wide range, and can significantly inflate Palantir's payroll expenses and weigh on its overall profitability. So, investors should listen in on management’s comments on their upcoming earnings call to get a sense of the actual headcount hiring figure.

Next, several market commenters and investors have based their bullish narratives on the premise that the significant expansion of Palantir’s sales team could result in an influx of new order wins. However, the problem of late is that COVID-19 outbreak has intensified and brought along fresh travel restrictions in several major economies across the globe which could limit the company’s international sales effort.

There’s the distinct possibility that the company defers its hiring for the sales process by a quarter or two at the very least. This implies that its pace of new order wins or possibly even its revenue growth rates, might not accelerate as many of us are hoping, not for the time being at least. So, look out for management’s comments on the same and how they plan on ramping up their sales team in COVID-19-times.

Lastly, when compared to other software infrastructure names, Palantir has one of the highest TTM stock-based compensation expenses relative to its revenue. While rewarding employees is a good practice, to keep the team motivated, there’s got to be some moderation as well so that these expenses don’t drag the company’s overall profitability lower. So, listen in on management’s guidance for stock-based compensation expenses and when they expect these expenses to subside. I personally expect these expenses to eventually decline to their pre-listing levels of $50 million to $80 million per quarter, as opposed to $241.8 million in Q4 2020, but only Palantir's top-brass can reliably comment on when this might happen.

(Source: BusinessQuant.com)

Setting Expectations Straight

Having said that, analysts are forecasting Palantir’s Q1 revenue to come in at $332.2 million. I think it’s needless to say but any material deviation from the Street’s forecasted figure could make the stock volatile. But here’s where it gets interesting. Granted that the analyst community as a whole projects Palantir’s revenue to continue growing in the foreseeable future, we must also take into account that the variance between the low and high-end estimates for the next three quarters is increasing. This suggests that the community of analysts is extremely divided on the company’s near-term growth prospects.

More to the point, pay close attention to Palantir's Q2 revenue guidance. Analysts are projecting the figure to stand at $344.3 million, implying a year over year growth of 36.6%. It’d be interesting to see if the company’s guidance comes in line with the Street’s expectations. Several market commenters, including yours truly, have said in the past that Palantir’s management sandbagged and issued a very conservative 5-year revenue outlook on their last earnings call and that their actual revenue growth figures would turn out to be much higher, especially now that they’re aggressively targeting the commercial space. So, look out for their Q2 revenue guidance figure as well.

Final Thoughts

Granted that there’s a fair bit of uncertainty surrounding Palantir’s near-term growth prospects but there’s nothing fundamentally wrong with the company. For all we know, these clouds of uncertainty might just disappear with the company’s upcoming earnings report. Therefore, I encourage readers and investors to examine the company’s Q1 performance on a deep level.

This includes tracking its stock-based compensation expenses, its customer base growth, monitoring its management’s revenue guidance and listening in on their comments around sales personnel hiring plans. As these clouds eventually clear out, the stock is likely to head north once again. Good Luck!

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.