Palantir Technologies Is Within The Optimal Buy Range Now
Summary
- Palantir recently launched Foundry for Builders, their product targeted at hypergrowth startups, heralded the company's entry into the SMBs space.
- We think this initiative is pivotal as this clearly demonstrates the potential scalability of the company's business model beyond the government and enterprise space.
- We also highlight some key metrics for investors to watch closely as the company is due to report Q2's report card on August 12.
Investment Thesis
Palantir's (NYSE:PLTR) business model may not be easy for some SaaS investors to understand. The company primarily serves some of the biggest government and commercial customers that many retail investors may unlikely to have worked intimately within their course of work or daily lives.
The company's ability to win huge contracts, particularly with the US government, has clearly demonstrated the high performance and credibility of Palantir's end-to-end data management platform that "enables organizations to improve their data-driven decision-making process by integrating disparate data sources into a single common operating picture."
The US government has also continued to leverage on the Tiberius platform that the company built for the government's massive vaccine distribution program, which we think clearly underscores the highly superior data management capability that some investors rarely give due credit to.
In the past, we may have been concerned about how Palantir would be able to expand its operations beyond the scope of its government business as the company did not convince us with the scalability of its business model to serve the smaller commercial customers, even though we think the company could continue to depend on its government and large enterprise base to scale as their contracts have been massive.
While we largely agree that Palantir's data management platform is highly sticky and not one that their customers could easily build out of or change vendors, we used to think that Palantir's relatively weak scalability potential among its smaller customers would hinder the platform's capability for global domination until recently, when the company launched the "Foundry for Builders," a platform that is "dedicated to supporting early-stage companies by providing them with the Palantir Foundry platform." With that, we think the game has truly changed. Now Palantir is finally ready to take on the world's siloed enterprise resource planning (ERP) systems.
Analyzing Palantir's Massive Contracts
SaaS peers annual contract value (ACV) per customer. Source: Atom Finance
The number of customers. Data source: Company filings
Palantir's massive contracts were put on clear display as the average revenue per customer came in at $8.1M in Q1'21, while the top 20 customers accounted for $36.1M each on average.
To better appreciate the scale of Palantir's average contract size, investors could easily glean that in the SaaS space, the median ACV per customer was only about $26K.
Palantir's focus on the largest customers has also seen the company accumulating only 149 customers as of Q1'21, which may have brought about certain skepticism concerning concentration risk. While the platform's well-proven stickiness is likely to mitigate the risk, we think this would always be a bugbear among investors who may be concerned with the scalability potential of Palantir's platform, making it challenging to find customers who are willing and able to adopt a platform where the company has proudly proclaimed to be the "central operating system (OS) not only for individual institutions but also for entire industries."
Then on Jul 20, Palantir launched Foundry for Builders, which is targeted at startups, proudly announcing Palantir's entry into early-stage companies and the SMBs space, as this "marks a continued expansion of its business beyond large organizations with complex data environments to younger companies."
We think this is a highly significant development, even though the initial launch only includes companies connected to the Palantir alumni. Previously, Palantir's doubters have often lamented that the company could never scale beyond big government contracts, and therefore significantly limiting the company's ability to target the huge SMBs space. However, we think that by reaching out to the early-stage companies for their initial launch, Palantir is clearly proclaiming to the market that their Foundry product is for anybody.
This also marks a departure from long-term contracts, which have often been the hallmark of Palantir's large government and commercial contracts by using a monthly subscription model for Foundry for Builders to improve the accessibility of the product for startups significantly.
While the space is entirely new to Palantir, Foundry's capabilities are certainly not new to these startups who are connected to the Palantir alumni, as the company can now leverage on their "feedback to refine the product for startups before rolling it out more broadly in coming months."
Importantly, by focusing the product on what Palantir called "hypergrowth startups," the company is leveraging cannily into companies who are ambitious and are focused on growing fast to penetrate their target markets, and believe that Palantir could accelerate the process as the company emphasized: "These companies don’t suffer from ‘not invented here’ pathologies and clearly see how building their SaaS offerings on top of Foundry could help shave years and millions of dollars off their time to market.”
We think investors should pay attention to the company's upcoming earnings call on Aug 12 to screen for important updates on this initiative as we think it could truly represent a transformative era for Palantir to take on an increasingly important role in smaller companies and disrupt the legacy ERP systems moving forward and fulfill its mission to be the world's enterprise OS.
Look Out for Palantir's Improvements in its SG&A Margins
LTM SG&A margin. Data source: S&P Capital IQ
Quarterly SG&A and Stock-based compensation (SBC) margin. Data source: S&P Capital IQ
The company has often alluded to using non-GAAP adjusted operating income figures that "[excludes] stock-based comp primarily" to highlight the company's operating performance. Therefore, when we pore into the GAAP numbers, we could see that the SBC has a significant impact on the SG&A margins as the company's LTM SG&A margins reached 121.7% in Q1'21.
However, if investors were to dig deeper, they would glean the outsized impact from the quarter ending Sep 20 that affected Palantir's SG&A margin as it coincided with its IPO launch. Therefore, that quarter is clearly an anomaly that we don't think would be repeated moving forward as the company has also emphasized: "[SBC] will normalize over the next couple of years as [the company is] working through this outstanding overhang. And at the same time, when you couple that with the top-line growth, we're going to continue to make progress towards profitability."
Forward Revenue Growth and EBIT Profitability
Revenue mean consensus estimates & revenue growth forecast. Data source: S&P Capital IQ
We could observe that the quarterly SG&A margins and SBC margins have clearly been trending down in the last 2 quarters post IPO. We think investors should continue to watch these two metrics as Palantir continues to scale and particularly watch for improvement in its operating leverage.
Importantly, the company is also expected to grow its revenue rapidly in the next few years at a highly remarkable CAGR of 29.1%. As a result, Palantir should see significant progress towards achieving EBIT profitability in the next few years. In addition, we also have not included the potentially accretive developments from Foundry for Builders yet into the company's operating performance moving forward while awaiting more details from Palantir on the broad-based rollout.
Watch for Improvements in the FCF Margins
Quarterly levered FCF margin. Data source: S&P Capital IQ
One aspect that we have been rather pleased with is the company's improvement in its levered FCF margin, on the back of a declining trend in the SBC margins, which we observed earlier. In addition, the company's improvement in its operating leverage has certainly been instrumental to its FCF margin improvement. We continue to observe whether the company can sustain its progress in this area in H2'21 and encourage investors to monitor the updates to its FCF profitability metrics and guidance in the upcoming earnings call.
Valuations
EV / Fwd Rev mean.
SaaS peers EV / Fwd Rev median.
At the current price, Palantir is trading at an EV / Fwd Rev multiple of about 25x, which is largely in line with its SaaS peers' median of 25.2x and coming below its own multiple mean since IPO of 27.7x.
Street mean target price. Source: TIKR
Meanwhile, the Street's mean target price of $21.79 indicates that PLTR is trading at a 1.4% premium from its last closing price, which values PLTR at an implied EV / Fwd Rev of about 24.6x, even though the company is expected to generate a stellar revenue CAGR of 29.1% over the next 4 years.
We are, therefore, a little perplexed at the Street's downbeat forecast on PLTR, which we thought looks reasonably valued right now, especially with the launch of Foundry for Builders, which should be accretive to the company's operating results moving forward if it could execute well.
EV / Fwd Rev trend. Data source: S&P Capital IQ
When we considered Palantir's forward revenue growth rates and revalued the company to a more conservative revenue multiple of 20x by the end of CY25, we expect Palantir to provide a potential appreciation of about 106% over the next 4 years (20x/9.7x), as long as the company could continue to execute well. Hence, we don't think PLTR looks expensive at its current valuation. Therefore, investors should consider taking the opportunity of its current weakness to add this high potential stock to their portfolios.
Price Action and Trend Analysis
Source: TradingView
When we observed its price action, we also arrive at a similar conclusion as to its valuations. The stock is currently testing a key support level at $21 that was briefly breached during the bear trap observed in May. Significant buying interest came onboard to trap bearish short-sellers and flush out the weak longs during the rotation.
Therefore, we are confident that the $21 price level would likely be defended strongly by the bulls, and the price action over the last 3 weeks continues to lend credence to this thesis. While the resistance level at $26 continues to hold this stock back from approaching its previous ATH, we think the current entry point to add PLTR is optimal, and investors should take full advantage of its weakness to add PLTR to their portfolios now.
This article was written by
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Analyst’s Disclosure: I/we have a beneficial long position in the shares of PLTR either through stock ownership, options, or other derivatives. 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.
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Comments (59)
Exp Date: 2022-06-17
Strike price: $40
Volume: 2175
Open Interest: 10297
(Source: Newsedge Equities, Aug. 6, 2021 @ 1:11pm)This is unusual compared to average volumes and also it is quite a bit “Out of the money”
Does author or anyone else want to have a crack at why traders and street is bearish, while many SA articles are REALLY bullish?
2021-08-02
PLTR Karp Alexander C. See Remarks S - Sale+OE $22.09 -1,915,887 6,432,258 -23% -$42,326,989
Long PLTR and looking forward to the upward move.
There was more positivity in Seadrill as it spun down the toilet bowl.
Im long 😁
Go to another site if you are bored. I find these articles to be informative.
Notice how they all seem to use the same picture. It's almost like they are following a template.....
Nice to know. But eating cold cereal everyday, gets old. Why don't PLTR authors get approval for pictures of (www.palantir.com/...).
That would actually be worthwhile, since no one seems to know about it.
Is this a good company - probably so, but I don't believe there won't be a better entry point in foreseeable future.