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

28 Likes
2

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

24 Likes
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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

9 Likes
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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

9 Likes
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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

10 Likes