Strong Start Driven by Palantir Earnings: AI Platform

We maintain our US$16 per share fair value estimate for narrow-moat Palantir (PLTR) after the firm kicked off fiscal 2024 with a set of strong financial results, largely in line with our prior estimates. Spearheading these results was continued momentum for the firm’s artificial intelligence platform, or AIP, a trend we see continuing, especially in the U.S. commercial space.

Key Morningstar Metrics for Palantir Stock

• Fair Value Estimate: US$16
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High

What We Thought of Palantir’s Earnings

While we model robust top-line growth and margin expansion for Palantir, we remain unable to rationalize the market’s current valuation on the name. For context, our top line and profitability estimates for the upcoming two years are all above consensus, highlighting our view that Palantir stands to materially benefit from increased AI spending as a leader in the AI platform space. Despite the firm’s shares trading down after hours, we continue to view them as overvalued.

When modelling Palantir’s growth and profitability, we also looked at a hypothetical bull case in which the firm’s AIP saw robust adoption as customers new and old flocked to use Palantir’s AI solutions to power their businesses. This scenario bakes in a higher-for-longer growth outlook for Palantir’s government and commercial businesses, resulting in a $22 per share fair value estimate.

First-quarter sales reached US$634 million, up 22% year on year and up 4% sequentially. While the sales number was shy of our above-consensus estimate, we were impressed by Palantir’s continued traction in the U.S. commercial market. Sales from this segment rose 40% year over year to US$150 million as Palantir increased its U.S. commercial customer count by 69% year over year to 262. We believe strong adoption of AIP within the U.S. commercial space is a good sign for Palantir as U.S. companies are often early adopters when it comes to software, with other global markets following suit. We were equally impressed by the firm’s strong forward-looking metrics, with remaining performance obligations, or RPO, up strongly year over year and outpacing revenue growth.

Palantir Raises Its 2024 Outlook

Along with strong sales growth, Palantir continued to expand its profitability, with first-quarter adjusted operating margins coming in at 36%, up from 24% a year ago. While the firm’s focus on profitability has been with a keen eye on S&P 500 inclusion, we believe the marked improvement in Palantir’s margins points to the inherent operating leverage built into moaty software businesses.

Over the past few quarters, Palantir’s net retention, a measure of the firm’s ability to upsell existing customers, has slid downwards as customer expansion has become difficult due to tough macroeconomic conditions. However, with strong AIP adoption, we are seeing a turnaround in the firm’s net retention metric, which clocked in at 111% in the first quarter, flat year over year and up from 108% last quarter.

Along with strong quarterly results, Palantir raised its outlook for 2024. The firm’s updated guidance calls for 2024 sales and adjusted operating income of US$2.68 billion and $874 million, both at the midpoint of guidance, up from US$2.66 billion and US$842 million previously. With three quarters of the year left to go, we view these revised estimates as conservative and are modelling Palantir to maintain its track record of exceeding its guidance on both fronts.

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