Palantir shares are currently trading at $41.47, up more than 140% year-to-date, reflecting strong Q2 2024 results and ongoing interest in AI-driven technologies. This comes after the company reported Q2 2024 results and was recently included in the S&P 500 index.
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- Revenue: $678.1 million in Q2 2024, up 27% year-over-year and 7% quarter-over-quarter
- Net income: $134.1 million in Q2 2024, compared to $28.1 million a year ago
- Adjusted EBITDA: $253.6 million in Q2, compared to $135 million a year ago
Palantir, a leading data analytics and AI software company, is experiencing strong growth driven by its AI Platform (AIP) and expanding commercial customer base. The company's Q2 2024 results demonstrate its ability to capitalize on the growing demand for AI solutions, with significant year-over-year growth in both revenue and profitability.
Business Model
The company's business model is evolving, with a strong focus on its commercial segment, particularly in the US market. The US Commercial business grew by 55% year-over-year, indicating Palantir's success in expanding beyond its traditional government clientele. It revolves around providing sophisticated data analysis and artificial intelligence solutions to a diverse range of clients, including government agencies and private companies. At its core, Palantir creates software platforms that help organizations make sense of vast amounts of complex data, enabling them to uncover insights and make more informed decisions.
The company offers several key products:
- Gotham: Primarily used by government and intelligence agencies to analyze large datasets and identify patterns, particularly for national security and counter-terrorism efforts.
- Foundry: Designed for commercial enterprises, helping them integrate and analyze data from various sources to improve operations and decision-making.
- Apollo: A system that manages the deployment and updating of Palantir's software across different environments, ensuring smooth operation and security.
- Metropolis: Tailored for financial institutions, assisting in fraud detection and market analysis.
Palantir's revenue model is based on software licensing and subscriptions, often starting with a pilot project or "bootcamp" that demonstrates the value of their platform. As clients see the benefits, they typically expand their use of Palantir's services, leading to larger, long-term contracts. This "land and expand" approach has been particularly successful in growing Palantir's commercial client base.
The company provides its software through various means:
- Cloud-based subscriptions: Clients access Palantir's software through a hosted environment.
- On-premises installations: Software is installed directly on the client's own systems.
- Professional services: Palantir offers consulting, training, and support to help clients maximize the value of their software.
What sets Palantir apart is its ability to tackle extremely complex data challenges that many other software solutions can't handle. Rather than offering a one-size-fits-all product, Palantir works closely with each client to customize its platforms to their specific needs and data environments.
Recently, Palantir has been focusing on its Artificial Intelligence Platform (AIP), which leverages the latest advancements in AI to provide even more powerful analytical capabilities. This has been a key driver of growth, especially in the commercial sector.
In essence, Palantir's business model is about selling not just software, but the ability to transform raw data into actionable intelligence, whether that's for national security, business optimization, or scientific research. As data continues to grow in volume and importance across all sectors, Palantir is positioning itself as a crucial partner in helping organizations navigate this increasingly complex landscape.
Rise to profitability
Palantir's financial position continues to improve, with strong cash flow generation and expanding profit margins. The non-GAAP operating margin of 37.4% represents a significant improvement from the previous year, demonstrating the company's ability to scale efficiently.
Palantir's financial position shows marked improvement, as evidenced by the chart. Key metrics demonstrate strong positive trends:
- Operating Margin has risen sharply to 15.53%, up from negative figures in late 2022.
- EBITDA Margin has reached 16.72%, indicating robust cash flow generation.
- Return on Invested Capital (ROIC) has turned positive at 7.17%, signaling value creation for shareholders.
These trends reflect Palantir's successful transition from prioritizing growth alone to balancing growth with profitability. The company is demonstrating increased operational efficiency, effectively managing expenses while scaling operations. This improvement in profitability metrics, particularly the significant jump in operating margin from the previous year to 37.4% (as mentioned in the Q2 2024 results), underscores Palantir's ability to convert revenue growth into profit more effectively. The positive ROIC indicates that Palantir is now generating returns above its cost of capital, a crucial milestone for long-term financial sustainability and shareholder value creation.
S&P 500 inclusion
The company's recent inclusion in the S&P 500 index is a testament to its growth and increasing market importance. This inclusion is likely to increase visibility and potentially attract more institutional investors. The news led to more than 36.5% share price growth. It was probably caused by investors trying to frontrun ETF funds which later on had to purchase Palantir shares. The company currently has 0.16% weight in the index, which might increase as shares soar.
High valuation
While Palantir is experiencing strong growth, investors should consider the high valuation multiples and potential risks. The stock trades at a forward P/E ratio of over 233 and over P/E forward of over 100, implying high growth expectations. Additionally, recent insider selling, particularly by chairman Peter Thiel, may raise some concerns.
Insiders are selling
Insider selling at Palantir has been a notable topic of discussion among investors and analysts. Recent reports have highlighted significant stock sales by key insiders, particularly by company chairman Peter Thiel. In a span of just one week from September 24 to October 1, 2024, Thiel reduced his holdings of Class A Common Stock from 55.6 million shares to 34.3 million shares, a substantial decrease. This large-scale selling by a prominent insider has raised some concerns in the investment community. However, it's important to note that insider sales can occur for various reasons unrelated to a company's performance or outlook, such as personal financial planning or portfolio diversification.
Other insiders, including CEO Alex Karp, have also engaged in stock sales, though Karp's transactions have been more complex, often involving the exchange of Class B shares for Class A shares, effectively maintaining his overall ownership stake. The volume and timing of these insider sales, particularly in the context of Palantir's recent strong performance and inclusion in the S&P 500, have led to increased scrutiny and speculation about the long-term confidence of key company leaders in Palantir's future prospects. While insider selling alone is not necessarily indicative of a company's health or future performance, it is a factor that investors often consider in their overall assessment of a stock.
Summary
The growing interest in AI technologies presents significant growth potential for Palantir. However, the company must navigate a competitive landscape and continue to innovate to maintain its market position. The success of AIP and the company's ability to expand its commercial customer base will be crucial factors in its future performance.
While current results and growth prospects are impressive, investors should carefully consider the high valuation and potential risks. Palantir's future performance will likely depend on its ability to maintain high growth rates, continue expanding its commercial business, and effectively monetize its AI capabilities.
Valuation
We decided to base our assumptions on historical averages. We have assumed a 31% revenue growth and 25% operating margin for the 5 years of forecasts. Decision to make 5 years of detailed forecasts rather than 10 years was made due to huge uncertainty over whether the company's robust growth rates will last. Other assumptions were based on 5-year averages.
As terminal value tends to account for a significant part of DCF valuation, especially with shorter periods of detailed forecasts, we have decided to take a very conservative approach here. For the terminal value calculations we have used a 4% revenue growth as well as 10% terminal WACC, down from 13% WACC used for 5 years of forecasts to capture the effect of AI business maturing.
Such a set of assumptions provides us with an intrinsic value of $12.86 per share which showcases a discount of 68% to current market price. The reason for such a high price can be attributed partly to the demand of S&P 500 inclusion.
A point to note is that the intrinsic value obtained via the DCF method is highly sensitive to assumptions made. Two sensitivity matrices are provided below - one for different sets of Operating Margin and Revenue Growth assumptions and the other for different sets of Terminal WACC and Terminal Revenue Growth assumptions.
Source: Bloomberg Finance LP, XTB Research
Source: Bloomberg Finance LP, XTB Research
Next, let's take a look at how Palantir compares with peers. We have constructed a peer group consisting of 3 companies, whose business model might be similar to Palantir: Alteryx, Splunk and Cognizant. As can be seen Palantir is above the mean for the peers in every aspect. We have calculated mean, median as well as cap-weighted multiples for the peer group. Three different Palantir valuations for each of those multiples were later calculated. As one can see in the table below, the vast majority of those suggest that Palantir shares are overvalued at current prices.
Source: Bloomberg Finance LP, XTB Research
Recommendations: Palantir has 20 recommendations, with 4 "buy" and highest price of $45, 9 “hold” and 7 “sell” with lowest price of $9. The 12-month average stock price forecast is $27.93, implying a 32.6% downside potential from the current price.
Technical analysis: Palantir is gradually approaching its all-time high of $44.98, which will act as the first support. If this level is breached, the price action could follow the previous structure, targeting $47.79, presenting a potential 15% upside. The first resistance is at the 30-day SMA, followed by the 2020 high of $33.46, a level that will soon be tested by the rising 50-day SMA.
The RSI is showing clear bullish divergence, with higher highs and higher lows, currently consolidating in the oversold zone. The last time this occurred, the stock saw a 120% price increase. MACD is also indicating bullish divergence and is approaching 2023 highs. While momentum still favors bulls, there is a risk of burnout if it continues without consolidation.
Source: xStation
