As markets tank due to the worsening macroeconomic environment, there are companies that once again trade at significant discounts to their fair value and have an opportunity to appreciate and create additional shareholder value once the dust settles. One such company is Palantir (NYSE:PLTR). As enterprises try to optimize their business processes to weather the upcoming economic crisis, while governments increase their defense spending budgets due to the changing geopolitical landscape, it becomes safe to assume that the demand for organized data on which stakeholders could act to create a meaningful impact is only going to increase. Palantir is able to address this need. While in the past I have already covered various solutions that the company provides, this article aims at highlighting Palantir's capabilities in space, which are less covered and are underestimated by the market, but which could also be one of the main growth drivers of the company in the future.
To enhance the capabilities of its AI-based solutions, Palantir has been actively exploring ways to enter the space domain by buying an equity stake in the satellite imagery company BlackSky (BKSY) last year and also partnering with Satellogic (SATL) to launch satellites into the orbit. By having additional eyes in the sky, Palantir has the ability to provide time-sensitive solutions to clients that rely on geospatial intelligence to achieve their goals. Thanks to both of those initiatives, Palantir was able to deploy various products that run on the Edge AI platform and help clients detect various objects or discover multiple patterns that are happening on Earth in real-time. What's also important to note is that Palantir doesn't rely on one particular satellite, as it has the ability to use the constellation of satellites to meet the needs of its clients at any time.
Going forward, the space domain will play a more important role both for the private and public sectors, as having the capabilities to analyze everything that's happening on the Earth could be crucial for Palantir's clients, who are looking for time-sensitive solutions that could impact their decision-making process.
That's why commercial satellite imagery services have been constantly added to the various security packages that the U.S. Department of Defense provided to Ukraine since the beginning of the Russian invasion in February, as they help Ukraine to locate Russian troops on Ukrainian soil, strike the adversary arms depots and better prepare their counteroffensives. On top of that, recently a popular Ukrainian charity has launched a crowdfunding campaign to buy its own satellite along with access to the constellation of other satellites, which were later transferred to Ukraine's Ministry of Defense, in order to help the Ukrainian Armed Forces to have additional eyes in the sky.
Considering the increased importance of geospatial intelligence, Palantir has been winning multi-million dollar awards from the U.S. Space System Command to develop solutions that would help the agency to have greater cross-space situational awareness. At the same time, earlier this year, Pentagon's National Reconnaissance Office awarded its largest-ever contracts to various commercial satellite imagery companies due to the rising demand for geospatial intelligence mostly thanks to the successful impact of satellite imagery in the ongoing Russo-Ukrainian war. One of the main beneficiaries of those contracts is BlackSky in which Palantir has an equity stake.
As a result of all of this, Palantir now has the opportunity to increase its client base and create an additional shareholder value at the same time as its capabilities in space improve, while the geospatial analytics market alone is forecasted to grow at a CAGR of 13% and worth $209.47 billion by 2030.
Given the improvement of Palantir's space capabilities along with the fact that the demand for satellite imagery services is increasing, it's safe to assume that the company has additional room for growth, especially since it generated only $1.54 billion in revenues in 2021, while the geospatial intelligence market alone could be worth over $200 billion by 2030.
To find out the intrinsic value of the business in the current environment, I created a DCF model in which revenues estimates for FY22 are in-line the management estimates, while in the following years the revenue growth is only 25%, below the company's initial growth target of at least 30% by 2025. The EBIT in the model is improving with each year mostly thanks to the decrease in stock-based compensations, which were broadly discussed in my latest article on the company where the latest earnings results were highlighted. The WACC in the model stands at 8%, while the terminal growth rate is 3%.
My calculations show that the fair value of Palantir right now is $10.03 per share, which represents an upside of nearly 30% from the current levels. However, this is rather a conservative estimate, as Palantir is still a growth company that is able to show double-digit top-line returns in the current environment after being in the business for nearly two decades. At the same time, there's a possibility that the growth rate itself will increase in the future due to the continuous increase of demand for AI-based software solutions that the company provides, which would increase its intrinsic value in the end.
The most obvious risk to the bullish thesis is a global recession, which will likely negatively affect Palantir's growth and could push its stock to even lower levels. The company has likely already failed to reach its initial revenue growth target of 30% this year, as the updated guidance shows that the management expects the company to generate ~$1.9 billion in the base case scenario, which represents a revenue growth rate of only ~23.5%. However, the good news is that there's an indication that Palantir has accelerated hiring, which is a sign that things are not as bad as the market thinks, and in the end, the top-line growth rate could be greater than expected in the following quarters.
Another risk is the potential additional losses that could result from previous investments in various risky endeavors in which Palantir participated last year when the market was on the rise. The company itself doesn't publicly disclose the performances of its investments, but since SPACs could continue to underperform in the future due to the uncertain macroeconomic situation, we could see additional losses in the upcoming quarterly reports. Palantir has already suspended its SPAC investment program after underperforming earlier this year, but there's always a possibility that those old investments will continue to have a negative effect on its financials in the future.
As the market is in disarray, Palantir once again trades at a discount and could be considered a solid stock to own for the long run in this changing geopolitical landscape. While there's a possibility that the company's shares could trade at distressed levels as long as the market continues to fall, the opportunities to own the company outweigh the main risks at this stage. There's clearly a need for Palantir's custom-built AI solutions and as its space capabilities improve, the business will be able to more efficiently deliver results, which in the end will lead to the growth in new clients and a subsequent appreciation of its shares in the long-term. That's why I think that the market has unfairly treated Palantir in recent months and that's why I continue to hold a long position in the company without any plans to unwind it anytime soon.
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This article was written by
It was there that I started to combine my academic knowledge with a passion for investing to build an all-weather portfolio that could overcome periods of constant economic and political uncertainty. Given the systemic shocks that have been happening to Ukraine in the last decade, I saw firsthand what’s it like to live in an environment where there’s too much unpredictability and no guarantee that your endeavors won’t fail. Despite this, I managed to show strong returns and since 2015 have been sharing some of my ideas here on Seeking Alpha.
Disclosure: I/we have a beneficial long position in the shares of PLTR, BKSY 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.
Additional disclosure: Bohdan Kucheriavyi and/or BlackSquare Capital is/are not a financial/investment advisor, broker, or dealer. He's/It's/They're solely sharing personal experience and opinion; therefore, all strategies, tips, suggestions, and recommendations shared are solely for informational purposes. There are risks associated with investing in securities. Investing in stocks, bonds, options, exchange-traded funds, mutual funds, and money market funds involves the risk of loss. Loss of principal is possible. Some high-risk investments may use leverage, which will accentuate gains & losses. Foreign investing involves special risks, including greater volatility and political, economic, and currency risks and differences in accounting methods. A security’s or a firm’s past investment performance is not a guarantee or predictor of future investment performance.