Is it time to talk about Palantir?

Investment Analysis Clubs Saul’s Investing Discussions
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With a track record of success and a long list of highly attractive attributes there’s a lot to like about the Palantir thesis and with its latest results on hand there’s substantial visibility and confidence to be taken from their go forwards position including:-

  • Growth at Scale
  • 6 successive quarters of GAAP profitability
  • AI & big data pure play potential
  • Pockets of hyper growth
  • A growth juicing crossover in segment revenue contribution (between Gov & Commercial)
  • A highly productive GTM formula
  • Cusp of S&P 500 inclusion
  • Enticing prospect of a strategic alliance with Oracle Cloud

For those that are unfamiliar with Palantir, it is a software company that operates in both Government fields with its Gotham big data solution and the Commercial field with its Foundry big data solution.

It added AIP to these product lines - its AI operating system offering which is the part of the business experiencing hyper growth right now. The AIP take up has been phenomenal driven by their unique book camp approach which aims to deliver AI use cases within 5 days. This has led to incredible high rates of large deal conversion.

Palantir are currently earmarked as next inline for promotion to S&P 500 having satisfied all qualification requirements (including GAAP profitability).

They recently announced a tie up with Oracle Cloud which is interesting. You have Snowflake aligning with Azure and now Palantir aligning with Oracle.

It has faced a substantial amount of negative criticism in the past stemming from the eccentricities of Peter Thiel (investor) and the current leader (Alex Karp). The company’s business model has also been, in my view unfairly, criticised as a consultancy company masquerading as a software company but to me it is no different to SAP or Peoplesoft where implementation services are often associated with software deployment.

Latest Q1 headlines:-
Palantir announced results this past week that beat on virtually every level but was rewarded with a substantial share price hair cut (aka a potential buying opportunity).

  • Revenues $634.33M (+20.8% YoY / +4% QoQ) vs $617.61M consensus

  • Earnings 0.8c per share vs 0.8c per share consensus and up from 0.5c in Q1 2023

  • GAAP EPS 0.4c vs 0.3c a year ago quarter

  • Full year guidance raised to $2.677B and $2.689B vs 2.68B consensus and up from $2.652B to $2.668B previous guidance

  • Operating Income was $226M a 36% Op Inc Margin

  • Scores 57% on the Rule of 40

  • RPO growth of 38% to $1.3B

  • NRR at 111% up from 108%

Once one digs below the surface one starts to see the hyper growth elements at play, like for like realities and the segmental crossover transition that could represent a forward indicator of growth acceleration…

  • Commercial revenues $299m (+27%)
  • US Commercial revenues $150m (+40%)
  • Customer count grew 42% year-over-year and 11% quarter-over-quarter to 554
  • Commercial customer count grew 53% to 427
  • US Commercial customer count grew 69% to 262
  • In Q1 Palantir closed 81 deals >$1m
  • US Commercial deals closed grew 94% to 136
  • US Commercial remaining deal value grew 74% YoY and 14% QoQ
  • US Commercial total contract value grew 131% to $286m

One of the features of their SPAC investing strategy was the taking on of “strategic” deals. These contributions and compares are still in run off which distort the true like for like business performance comparisons.

If you strip out SPAC strategic deal related contributions then the underlying like for like comparisons get really interesting:- Like for like (ex SPAC) US Commercial revenue growth was 68% (in line with their customer growth).

A forward indicator of potential growth acceleration is also emerging from 2 segmental crossover points:-

  1. Commercial revenues reaching and surpassing 50% of total revenues vs Gov revenues
  2. US Commercial revenues reaching 50% of commercial revenues vs non US

The Presentation slides are here:
https://seekingalpha.com/article/4689897-palantir-technologies-inc-2024-q1-results-earnings-call-presentation

Earnings call transcript is here:
https://seekingalpha.com/article/4689922-palantir-technologies-inc-pltr-q1-2024-earnings-call-transcript

Brad’s Stock Market Nerd write up is here:

Oracle partnership announcement here:-
https://seekingalpha.com/news/4087267-oracle-partners-with-palantir-to-jointly-sell-cloud-and-ai-services

I’ve been a holder since just after original listing and topped up when it dropped back below listing value last year and retain a ~4% holding

Ant

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Ant,
Here is the counter-point as I was considering this one. The Cliff’s notes version:

  1. Expensive on both trailing and forward earnings/FCF bases
  2. With no further dilution by stock based compensation, the company needs to grow FCF by over 25%% annually for the the next decade to justify its current price.
  3. Stock based comp was staggering - Share count grew over 8% in 2023.
    I should warn you that his RDCF model has bad inputs for market cap and shares outstanding, but the real numbers produce a more challenging road ahead.

Vince

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It is certainly valued highly and SBC has been constantly criticised however they have committed to bring that down (can’t believe Peter Thiel wants to be diluted) and free cash flow is really pumping.
Ant

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Hi Ant,

I was in Palantir when It was $9/share, for time reference not to talk about valuation. I got out because at the time the creation their Ontology was a heavy lift for the Enterprise.

I loved this part of your write up and am wanting for some further comparison to Snowflake…
…like for like realities and the segmental crossover transition that could represent a forward indicator of growth acceleration…

  • *Commercial revenues $299m (+27%)
  • US Commercial revenues $150m (+40%)
  • Customer count grew 42% year-over-year and 11% quarter-over-quarter to 554
  • Commercial customer count grew 53% to 427
  • US Commercial customer count grew 69% to 262
  • In Q1 Palantir closed 81 deals >$1m
  • US Commercial deals closed grew 94% to 136
  • US Commercial remaining deal value grew 74% YoY and 14% QoQ
  • US Commercial total contract value grew 131% to $286m*

Snowflake for Comparison:
…Their customer metrics were mixed. Overall customers grew +6.1% sequentially, the best in over a year, and an acceleration from last year’s +5.9% seq. However, custs>1M was a weaker +5.7% seq. Mgmt also noted they had 83 custs>5M, and signed their their largest deal ever (5y $250M, aka $50M/yr). They also added a net new +14 G2K customers, taking their share from 32.1% to 34.6%.*
Also Snowflake

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So, it’s really difficult to get like for like compares between Snowflake and Palantir customer counts. I did appreciate this note from Muji’s Hhhypergrowth.com article, around Snowflakes Q4. It does add some important context. Snowflake has dropped the “stable edges” naming, but data sharing continues to drive their network effects. The number of customers using data sharing regularly has risen from 22% to 28% over the past year, or +2pp seq. This means it is now 2494 customers +55%, growing a record +274 seq.

I apologize for making such a mess of the numbers above; but, That’s my whole point…Doing like for like compares is difficult.

I now understand that the friction to bring Palantir into the Enterprise is less. Customer growth has improved a lot. But, when I attempt to compare Palantir with Snowflake, in this way, I still see a lot less friction for an Enterprise to start to benefit from Snowflake, when looking at what they both share in there offerings.

I’m sure many here might be better able to compare customer growth difference and do a straight forward extrapolation out of the past into the future. Is there any other way your looking at this comparison between Snowflake and Palantir and/or is it just that you feel there is room for both in this huge TAM?
Best

Jason

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Hi Jason - an interesting comparison.

Actually hearing from folks in enterprises who have seen demos of both set ups, recognise more in common between Palantir and Snowflake than investors are picking up and they do compete over more use cases than is typically highlighted.

Still - I feel there is room for both now that Palantir has AIP:-

Without it, I feel it would have stayed a low enterprise count, Government led big data business which I would chose to invest in Snowflake over.

With AIP they have an AI operating system play that is sufficiently additive to the Snowflake offerings that has broader enterprise adoption potential and on the implementation friction front, they have dispelled that with their 5 day boot camp go to market strategy. Not that I see intensive deployment as necessarily a barrier.

I highlighted SAP and Peoplesoft before but it you look at ZS - they make a virtue out of C-Suite led consultative selling and implementation. It helps the enterprise customers take it seriously and increases the commitment and stickiness of their roll out. The intensive nature of roll out has also already delivered a benefit in fostering the partnership with Oracle to help support this endeavour.

To answer your final question - yes I see room for both and hold a 5% stake in Snowflake too.

Ant

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I took a closer look at Palantir since Ant started this thread with a great write up.
Despite some reservations, I just swapped out my 3% position in Cloudflare, which I’d held for more than 4 years, and sold some Tesla to buy what is now a 6% position in Palantir.

I’m not a tech guy and really don’t understand what they do, more to the point - I don’t know what their special sauce is. Nonetheless, I understand why ‘on-Prem is cool again’, as was said by Jensen Huang at the Dell conference a couple days ago.the fact that Open AI is a customer of Palantir doesn’t have as much an effect on my decision as it would have some years ago, I appreciate the extentof the partnership more now; but, it is noteworthy.

In answere to my own questions above…
On the Q3 2023 conference call PLTR had indicated that they set a goal for conducting 500 bootcamps within a year, and they ended up conducting 560 bootcamps across 465 organizations over a 4-month period, as indicated on the Q4 2023 conference call. On the Q1 2024 conference call, PLTR disclosed that over 915 organizations had participated in bootcamps, which is almost double their original goal in less than 9 months. At this rate, PLTR will more than double its original goal and may even triple the number of organizations it set out to host bootcamps for. The monetization of bootcamps is only just beginning as PLTR has not signed less than 80 new contracts worth at least $1 million since Q3 2023. Their previous record was 78 contracts of at least $1 million in Q3 of 2022. In Q1 2024, PLTR added 87 contracts valued at $1 million or more, while 27 were at least $5 million, and 15 deals exceeded $10 million.

Are the boot camps scalable? I believe perhaps that they are. And… PLTR does not include revenue from new customers on a trailing twelve-month period (TTM), so the 111% net dollar retention that PLTR reported doesn’t account for the increase in U.S. commercial customers.

Jensen Huang has also stated, many times, that The Data Wranglers are ‘sitting on goldmines’. Looking at the numbers from before Palantir offered AIP and now, I can see his point.

Ant-
It added AIP to these product lines - its AI operating system offering which is the part of the business experiencing hyper growth right now. The AIP take up has been phenomenal driven by their unique book camp approach which aims to deliver AI use cases within 5 days. This has led to incredible high rates of large deal conversion.

Best

Jason

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Edit:
The original post here made it sound like the sale Palantir made to the US Army -Maven Project was a huge deal in and of itself when actually I discovered that Maven is just a part of a larger sale to the over all Dept of Defence. I’ve deleted the original post and added the formal announcement of the over-arching deal here:

5/30/24: Palantir Technologies Inc. (NYSE: PLTR) today announced that the Department of Defense Chief Digital and Artificial Intelligence Office (CDAO) awarded its subsidiary, Palantir USG, Inc., a production contract to make licenses of their AI-enabled operating system available across the Department of Defense. Starting with an initial order of $153 million to support certain Combatant Commands and the Joint Staff, additional awards can be made up to $480 million over a 5-year period -(Snowflakes largest deal ever was about half this size).

Additionally, CDAO has awarded Palantir a prototype Other Transaction (OT) for $33 million to rapidly and securely onboard third-party vendor and government capabilities into the government-owned, Palantir-operated data environment to meet priority Combatant Command digital needs.

“These awards represent a vital step in warfighter adoption of AI, moving cutting-edge technology from experiment to enterprise production,” said Shannon Clark, Head of Defense Growth, Palantir. “We are proud to support the CDAO, enabling commanders to make better, faster decisions across all domains at unprecedented scale.”

Palantir’s commercial solutions will be part of the larger CJADC2 ecosystem integrating with other vendors and programs to support battlespace awareness, global integration, contested logistics, joint fires, and targeting workflows. Users will benefit from the current data integrations created as a result of Palantir’s work on fielding AI/ML tools for the warfighter over the last several years.

“In this era of geopolitical competition, the CDAO has become an essential leader in bringing operational CJADC2 capabilities to life through the agile, effective, and responsible deployment of AI/ML,” said Akash Jain, President of Palantir USG. “Palantir is honored to continue supporting the CDAO’s mission to develop, field, and scale AI-enabled solutions that advance U.S. defense, and we look forward to working alongside America’s warfighters to ensure these efforts are effective where they matter most – in the field and in the hands of decision-makers at all echelons.”

Additionally, government operators and third-party vendors will be able to build data integrations, pipelines, and applications within the platform or on other platforms through open APIs and Ontology Software Development Kits (OSDKs). Palantir’s open infrastructure provides organic use for flexible and rapid response at speed while maintaining the secure collaboration needed to ensure access controls and data protection.

This work follows Palantir’s long-standing partnership with CDAO to support the Global Information Dominance Experiment (GIDE) events, and the development of proven, real-world applications for advanced technologies.

Palantir repeatedly stated, in their most recent Q1 Confernce Call, referring to the robust success of the AIP offering in the private Enterprise space, that this success will be moving quickly into and expanding throughout their Governement contracts (the other 50% of their sales).

As the deal is described above, It does sound to me like this sale was made because of AIP. What do you think?

Palantir is now 11% of my portfolio.

Best

Jason

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This episode of The Cube focuses on Agentic AI.

At about 12:40 they’re stating that “the digital representation of the Enterprise is the hardest part, that’s why it’s in red.” And “Palantir is way ahead in this space.

To me, the way they describe This space in the AI Stack, on the Cube, sounds a lot like what Nvidia’s Digital Twins is all about. I’m likely wrong here; but, am I?

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Q2 results are out the market seems to be re-assured.

Headline results tailed up as the high growth US Commercial parts of the business continued to pull the business as a whole with it and Government growth re-accelerated.

The majority of the Q2 growth rates increased on a YoY basis but I notice that some of the QoQ growth rates actually lowered which will make this interesting when they start to lap their initial re-acceleration period from Q4 onwards.

Q3 guidance beat expectations and they raised their Full Year guidance for 2024. So far across the 2 raises this year they have increased their full year outlook by nearly $100m to $2.742 – $2.750 billion. They have also raised their Adjusted Op Inc to $966 – $974 million.

Headlines:-

  • Revenue grew 27% year-over-year and 7% quarter-over-quarter to $678 million
  • Total revenue excluding strategic commercial contracts grew 30% Y/Y and 10% Q/Q to $669 million
  • Commercial revenue grew 33% year-over-year, (40% growth when stripping out strategic contracts) and 3% quarter-over-quarter to $307 million
  • Government revenue grew 23% year-over-year and 11% quarter-over-quarter to $371 million
  • US government revenue grew 24% year-over-year and 8% quarter-over-quarter to $278 million
  • Closed 27 deals over $10 million, 33 deals over $5m and 96 deals over $1m
  • Customer count grew 41% year-over-year and 7% quarter-over-quarter
  • Commercial customer count grew 55% to 467
  • Adjusted income from operations of $254 million, representing a margin of 37%
  • Adjusted EPS grew 80% year-over-year to $0.09
  • Cash from operations of $144 million, representing a 21% margin
  • Adjusted free cash flow of $149 million, representing a 22% margin
  • GAAP EPS at 6c up 500%
  • Rule of 40 increased from 57% to 64%
  • Total RPO increased from $1.3bn to $1.37bn QoQ (an increase of 41% year-over-year and 5% sequentially)
  • $4.3 billion in total remaining deal value, an increase of 26% year-over-year and 5% sequentially
  • TCV booked was $946 million, up 47% year-over-year
  • Net dollar retention was 114%, an increase of 300 basis points from last quarter

Within their higher growth part of the business (~25% of Palantir), experiencing elements of hyper growth the picture looked very positive:-

  • US commercial highlights
    • US commercial revenue grew 55% year-over-year and 6% quarter-over-quarter to $159 million
    • US commercial customer count grew 83% year-over-year and 13% quarter-over-quarter to 295 customers
    • US commercial total contract value $262m up 152% YoY
    • US commercial remaining deal value (“RDV”) grew 103% year-over-year and 11% quarter-over-quarter
    • US Commercial deals closed was 123 an increase of 98%

Earnings call transcript:-
https://seekingalpha.com/article/4710641-palantir-technologies-inc-pltr-q2-2024-earnings-call-transcript

Link to earnings report:-

Link to presentation:-

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My favorite slide from the presentation

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I believe this report should give pause to the argument that no one is making any money from the use of AI.

If not, than perhaps Bert @ TickerTaget.com and Muji’s @ Hhhypergrowth.com would make a bit more compelling argument, below.
Bert-

… a huge amount of mis-information about how no one is using generative AI … Google as a bit of a bellwether for companies that I do follow. Cloud revenue growth was 30% compared to expectations of 27%. The company’s management said some of this upside was driven by growth at greater rates than anticipated by consumer AI apps while enterprise AI apps growth was still in a nascent state.

The results from Pega and from ServiceNow ought to serve as a warning that those who do not see how generative AI is reshaping the software business simply aren’t looking in the right places or perhaps better said, aren’t looking at the right metrics. Pega doesn’t offer guidance but the acceleration in ACV growth is perhaps the strongest indicator that the company’s generative AI offering is driving sales.

In the interest of Time, I will just briefly mention IBM. Its growth certainly wasn’t stellar, but what it did say about generative AI demand, and how that was providing a tailwind for its software growth was also instructive.

The fact that Google, Meta and MS are all accelerating their investment in AI hardware really is a telling positive for actual demand for AI solutions that is exactly opposite to the way software shares are trading.

Muji-

Following Q2s, despite the drops in share price, the hyperscalers are all-in on the outsized demand for enterprises to leverage Generative AI, plus the potential to leverage it themselves in their own commercial & consumer operations. All are committing to massive GPU and DC build-outs from here, not only in the US but globally – which should drive the hyperscaler demand for NVIDIA for years.

Best,

Jason

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It was a good q for PLTR but as you suggested Ant, I found the seq growth waning a bit from the very strong last 3Qs boost from AIP/bootcamps.

I think the reaccel in US Gov appeared at a good time to mask that.

US Comm rev 6% seq vs over 12% last 3Qs
CRPO $ flat seq (dropping it to mid 20% growth)
Net new custs 33 (40+ last 2Q… rose to +83% yoy from easy comp of last pre AIP Q)

Just a few things to watch in a good Q.

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@PalantirTech moat.
Mandatory requirements listed before the State Dept will consider a bid seem to exclude all but Palantir!

Everything that happens on the commercial side is because of the government/defense side, Alex Karp, CEO of Palantir.

Here is a potential @StateDept deal. Look at the mandatory qualifications. They are looking for:

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Here some actual use cases, making a compelling value proposition for the Enterprise.
…
JADC2 is a concept for the DOD to be able to see the entire battlefield in a single glass pane. This is done by connecting sensors and live data and pushing it into a unified network powered by AI/ML. This past February @DepSecDef said “the minimum viable capability for JADC2 is real and ready now."

How big of an advantage is this? “Ask the Russian’s” Dr. Karp.

JADC2 in an image, imagine everyone in this chart logging onto Foundry. Each person has different permissions but the facts and data are all the same. No one see’s anything old and or different. Everyone is logged onto “JADC2” foundry link.

Example, you are a Commander in the Air Force watching The Taiwan Strait, you see out in the distance a Chinese aircraft carrier. What do you do? You see what assets are in the area, what potential maneuvers can be done and what their potential outcomes might be. The commander decides to send a drone to fly over the Strait towards ship. The ship turns around, thus preventing a potential invasion or start of a blockade. The commander calls the drone back.

Why is this special? Knowing what tools you have at your disposal to the exact T and Where the enemy is, is an advantage like no other. You can coordinate with your allies and superior officers to ensure that when the warfighter is going into an area of interest, he or she is equipped the most cutting edge technology to carry out the mission successfully without error.

This only works if the entire DOD works as 1 enterprise, synergy throughout. Everyone seeing the same glass pane.

I think this helps understand the value of the Semantic layer in the AI stack. Does anyone here know of anyone else, besides Palantir, doing this? Of course Snowflake is still needed for Data Sharing. Of course aim also following Databricks; but, there still private. What else is already out in the wild?

Best

Jason

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Ok so Palantir torched it with continued re-acceleration in total plus Gov and Commercial revenues. US looks strong as a whole. $1bn in free cash flow in TTM. Large value deal count remains elevated:-

Q3 Non-GAAP EPS of $0.10 beats by $0.01.
Revenue of $725.52M (+30.0% Y/Y) beats by $21.83M.

Q4 Outlook: Revenue of between $767 - $771 million vs. consensus of $744.04M.
Adjusted income from operations of between $298 - $302 million.

2024 Outlook: Raised revenue guidance to between $2.805 - $2.809 billion vs. consensus of $2.76B.

Raised U.S. commercial revenue guidance to in excess of $687 million, representing a growth rate of at least 50%.

Raised adjusted income from operations guidance to between $1.054 - $1.058 billion.

Raised adjusted free cash flow guidance to in excess of $1 billion.

Q3 2024 Highlights

  • Revenue grew 30% year-over-year and 7% quarter-over-quarter to $726 million (up 32% excluding strategic contracts)
  • U.S. revenue grew 44% year-over-year and 14% quarter-over-quarter to $499 million
  • U.S. commercial revenue grew 54% year-over-year and 13% quarter-over-quarter to $179 million (up 59% excluding strategic deals) and booked $297 million of U.S. commercial TCV, representing 13% growth sequentially. Total remaining deal value in our U.S. commercial business grew 73% year-over-year and 7% sequentially
  • U.S. government revenue grew 40% year-over-year and 15% quarter-over-quarter to $320 million
  • Third quarter Commercial revenue grew 27% year-over-year and 3% sequentially to $317 million. Excluding the impact from strategic commercial contracts, Commercial revenue grew 30% year-over-year and 3% sequentially. Third quarter Commercial TCV booked was $612 million, representing 52% growth year-over-year and 62% growth sequentially
  • Closed 16 deals over $10m (down from 27), 36 deals over $5m (up from 33) & 104 deals over $1 million (up from 96 in Q2)
  • Customer count grew 39% year-over-year and 6% quarter-over-quarter
  • GAAP net income of $144 million, representing a 20% margin
  • GAAP income from operations of $113 million, representing a 16% margin
  • Adjusted income from operations of $276 million, representing a 38% margin
  • Rule of 40 score of 68%
  • GAAP earnings per share (“EPS”) grew 100% year-over-year to $0.06
  • Adjusted EPS grew 43% year-over-year to $0.10
  • Cash, cash equivalents, and short-term U.S. Treasury securities of $4.6 billion
  • Cash from operations of $420 million, representing a 58% margin and $995 million on a trailing twelve month basis
  • Adjusted free cash flow of $435 million, representing a 60% margin and over $1 billion on a trailing twelve month basis
  • RPO increased 15% QoQ to over $1.57bn
  • Billings increased 15% QoQ to $824m from $718m
  • Third quarter TCV booked was $1.1 billion, up 33% year-over-year and 16% sequentially. Net dollar retention was 118%, an increase of 400 basis points from last quarter
  • Revenue from strategic commercial contracts was $9.6 million for the quarter - and anticipate fourth quarter 2024 revenue from these customers to decline to between $6 million to $7.5 million compared to $20 million in the fourth quarter of 2023. “We continue to anticipate 2024 revenue from these customers to be less than 2% of full year revenue.”

Earnings Presentation:-

CEO Letter & Webcast:-

My take:-

A very strong print with very solid guidance. They have reaccelerated about as far as I could have hoped for to put them in as strong a position as possible pending lapping the AIP takeoff that occurred in Q4 a year ago.

They should continue to deliver decent double digit YoY growth underpinned by ongoing high single digit QoQ growth (and double digit QoQ growth in pockets) and supported by $1.57bn of RPO (equivalent of 2 quarters of revenue).

Positive Points of Note:-

  • US commercial growth led by AIP
  • US Gov growth now including AIP adoption
  • Defence distribution agreement with L3Harris
  • Implementation collaboration with Oracle
  • AI LLM partnering with META
  • Enhancements to complementary AIP tech features and sector specific deployment (supply chain, health, defence, oil and gas)
  • Profitability and cash flow performance
  • RPO and Total Remaining Deal Value growth

Concerns:-

  • SBC at 19.6% of Revenues in Q3
  • Ex US growth rates (sequentially negative)
  • Imminent lapping of AIP takeoff and lowering of YoY growth rates
  • Plateauing and softening of some growth, deal count, customer growth metrics
  • Potential for US Gov market saturation
  • Valuation levels
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In full disclosure whilst I loved the results and the potential for YoY compares success from Q4 and beyond, I have trimmed my Palantir holdings at 55 and 61 purely due to its extreme valuation and to fund the opportunity to add to Nvidia, Gitlab and Pagaya which all represent AI use case opportunities.

It is still a top 5 holding though for me and I find the business and its performance compelling.

Ant

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