Palantir (PLTR) surged on Aug. 12 after it posted its second-quarter earnings. In a broader perspective, the stock has moved a lot since its IPO in September last year. Now, should you, as an investor, buy it?
Accelerating growth
Palantir’s growth is accelerating since 2019. The second-quarter revenue rose as quickly as last quarter, namely 49% year over year. Revenue reached $376 million, beating estimates by $14.5 million.
Palantir’s government revenue growth slowed down from last quarter but it stayed at an astonishing pace, 66%. These deals are worth $232 million. Commercial revenue reached $144 million leading to a growth of 28%.
The slower growth in government contracts is offset by a fast acceleration in the commercial segment. This proves that Palantir has a growing number of customers who are not governments. This is essential as government contracts have less long-term growth potential than commercial contracts.
Palantir’s commercial growth comes from the U.S. market. Its U.S. commercial revenue surged 90% year over year. This should be compared to a 72% growth in the first quarter of 2023. If you consider the possibility to develop in Europe, the growth potential stays huge.
Improving margin
Palantir remained unprofitable and the year-over-year comparison shows an increasing loss ($110.5 million vs $138.6 million). Its adjusted gross margin, which excludes its stock-based compensation and other one-time expenses, expanded from 80% to 82%. Its adjusted operating margin jumped from 11% to 31%.
Increasing margins mean that a company has market power, i.e. the possibility to set price above marginal costs. This strength comes from its experience with the U.S. government — for which it aims to become the “default operating system” – which makes a great impression on customers.
Great guidance
Palantir hopes to generate $385 million in revenue in the third quarter, while investors expect $380 million.
Palantir also expects yearly growth of at least 30% until 2025. This would lead to revenue of $4 billion in 2025. The expectation for free cash flow in 2023 was raised from $150 million to over $300 million.
Now you likely better understand why Palantir has a price to sales of 30 times this year’s sales.
A drawback to consider
Palantir’s platform is really efficient in finding data from individuals, but its use is controversial.
Palantir’s Gotham platform is used by all branches of the U.S. military, as well as government agencies like the FBI, CIA, and ICE. This omnipresence is good, but Palantir was also used to track down and report undocumented immigrants in the U.S.
This use led to protest from activists and Palantir’s own employees. Amazon Web Services’ — which hosts Palantir — employees called for its shutdown. If more controversies come to light, the stock can be under pressure.
Bottom line
Palantir is one of the best companies in the market. Current social unrest will lead to increasing demand for its product. Moreover, the quality of services rendered to governments will attract a growing number of customers.
Palantir has set clear goals for the future, and it could easily surpass its 2025 targets as it expands its government and commercial businesses. Those growth opportunities should justify its relatively high valuation and offset any concerns about its controversial contracts.
This article was written by u/Beautiful-Ad-8447.
