Palantir stock market not happy with fourth quarter results

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Thesis article

Palantir Technologies Inc. (PLTR) released its fourth quarter results which helped the company easily beat revenue estimates. The market is still not satisfied with the results. We’ll look at the important parts of the report, the positives and the negatives, to assess whether the company is on track to meet its own goals.

Palantir Q4 Results – Key Figures

Palantir Technologies’ fourth quarter revenue and net income performance was as follows:

Palantir Q4 2021 Results

PLTR results (Seeking Alpha)

Revenue easily beat estimates, growing 34% year-over-year, while earnings per share were half as high as expected. I think the revenue pace is more important than the bottom line failure because the strong revenue performance shows that the business model is intact and is actually performing better than what Wall Street expected was waiting. Profitability is low anyway, and a company like Palantir isn’t primarily valued on earnings at its current stage, so the shortfall isn’t too maddening, I believe.

Palantir business growth is on track

Palantir Technologies is considered a growth investment by most of its shareholders. The company’s growth performance is therefore naturally one of the most important factors to consider.

During the fourth quarter, Palantir not only managed to exceed revenue estimates, but its revenue growth rate also stabilized at the 35% level, where it was also in the previous quarter. From the second to the third quarter, Palantir’s revenue growth rate had slowed significantly, which worried some investors who began to believe that revenue growth would continue to decline. This did not materialize, however, as the PLTR maintained its growth rate in the 30s range for a second consecutive quarter.

Palantir managed to grow the commercial side of its business at a very attractive pace during the fourth quarter. During the fourth quarter, the company added 34 new customers on a net basis, which was on par with the third quarter and well ahead of the customer acquisition performance in the first half of the year. . The company closed a total of 63 deals worth more than $1 million, including 27 worth more than $5 million. I think that having a wide range of new agreements with many new customers shows that Palantir is successful in diversifying its business. A bearish argument against Palantir is that the company was too dependent on large contracts with the government or government agencies. What we have seen over the past few quarters, however, is that PLTR has managed to grow the commercial side of its operations much faster than the government business. This was also verified during the fourth quarter:

Palantir revenue growth in Q4 2021

PLTR revenue growth (PLTR presentation)

Commercial revenue grew nearly 50% year over year, at a rate nearly twice the rate of government revenue growth. In the US, commercial revenue growth was exceptional at 130%, although it should be noted that the business is growing from a relatively small base there.

The fact that small businesses are growing faster than large government enterprises has positive implications for future company-wide revenue growth. If PLTR manages to keep current growth rates intact for some time, trading revenue will contribute a larger share of the overall revenue created by the company. This will result in a greater portion of company-wide revenue growing at a rate of over 40%, which will increase the overall revenue growth rate, all else being equal.

Palantir’s commercial revenue growth rate in the fourth quarter was higher than the commercial revenue growth rate during the first quarter in the third quarter, indicating that the company’s investment in sales personnel appears to be growing. paying:

Palantir Q4 2021 Business Dynamics

PLTR Business Dynamics (PLTR Presentation)

With strong momentum for business operations, Palantir may be able to grow this side of its operations even faster in the first quarter and beyond. Based on the acceleration in growth we’ve seen over the past two quarters, growth of over 50% in the first and second quarters seems quite achievable, I think. The company continues to invest in sales staff and adds experienced executives to further energize this side of its operations. For example, Palantir recently appointed a new head of its EMEA operations, Philippe Mathieu, who came from Oracle (ORCL), where he was also responsible for the EMEA region. Under his leadership, Palantir should be able to further develop its already strong business operations in this region, strengthening ties with existing customers such as Airbus (OTCPK:EADSY), Ferrari (RACE) and others, and adding new customers. The experience of Philippe Mathieu (he was responsible for 16 billion dollars in revenue at Oracle) and his connections in this region should contribute to this.

Overall, the growth rates we see for Palantir company-wide and for Palantir’s business operations deflate several bearish arguments. Overall growth did not slow down significantly, since it stabilized in the mid-1930s, in line with the previous quarter. Business activity is growing rapidly and adding a large number of new customers, showing that PLTR’s offerings must be attractive or customers would not increase their business with Palantir. Last but not least, strong growth in trading activity will make the PLTR more diversified over time, thereby reducing reliance on government contracts (a key argument against the PLTR advanced by some bears).

Palantir Profitability Ramp

Palantir is not yet profitable on a GAAP basis. This is, I believe, not necessarily a huge problem as long as two conditions are met: first, the company must continue to grow its business rapidly, and second, margins must follow a clear upward trajectory. These two conditions are currently met. Business growth is very healthy, as shown above, while Palantir is also making great progress in improving its profitability:

Profitability of PLTR stock

PLTR profitability (PLTR presentation)

Adjusted operating margins are relatively stable at around 30%, but due to the exclusion of equity compensation here, that figure isn’t too telling. On a GAAP basis, where SBC is counted, Palantir is still losing money. The trend in its margins, however, is pretty clear – over the past year, the company’s GAAP operating margin has improved by 3,500 basis points. Even on a quarterly basis, Palantir saw a 900 basis point improvement in its operating margin. Two more quarters with margin improvements at this level, and Palantir will be easily profitable on a GAAP basis. I therefore view the profitability development as quite positive so far, as PLTR appears to be on track to achieve profitability not only on an adjusted basis but also on a GAAP basis, taking SBC into account.

PLTR stock dilution problem

However, not all is positive in the recent report. Bears and even many bullish investors are unhappy with the continued dilution in Palantir’s stock count. In general, that’s fine – dilution hurts shareholders, as their share of the overall company continues to decline, all other things being equal. It can be argued, of course, that equity compensation is important in attracting top talent, as the market for engineers and other specialists is competitive.

Looking at Palantir’s fourth quarter share count, at 2.01 billion, we see a 2.5% increase from the previous quarter’s count of 1.96 billion. This corresponds to an annualized growth rate in the number of shares of around 10%, which is quite high. If earnings grew by 35% per year in the future, while the number of shares increased by 10% per year over the same period, real earnings per share would not increase until the mid-20s. wouldn’t be a disaster, of course, but the difference between the growth rate per share and the overall company-wide growth rate is still very large.

There is some good news hidden in these numbers, however. Palantir’s share count has increased 14% over the past year (Q4 2020 to Q4 2021) and nearly 100% for the comparison between fiscal 2020 and fiscal 2021. The rate growth in the last quarter, around 10% annualized, is therefore significantly lower than in previous quarters. If this trend remains in place, which I think is a reasonable baseline assumption, then SBC will be less of a headwind going forward, and dilution should slow further in 2022 and beyond. Investors should keep an eye on the company’s SBC trend and any deviations. If share count dilution were to accelerate again (I don’t think that’s likely at this time), that would be a major cause for concern.

Carry

Palantir has seen its shares significantly underperform the market in recent months. This matches the performance of many other expensive growth stocks and does not appear to be a company-specific issue.

Palantir had a very strong fourth quarter overall. The company has easily exceeded revenue expectations, the first quarter guidance is above consensus estimates, commercial revenue growth continues to accelerate, and the company is becoming less dependent on government contracts (although this side of its activity also continues to grow at an attractive rate). With investments in its commercial teams and thanks to strong momentum, commercial revenue growth should remain strong in 2022.

The company is currently trading at around 14 times this year’s sales, which is not a low valuation. For a company with a huge moat, strong growth, sky-high gross margins, and a decades-long growth track, a low-teen sales multiple doesn’t seem outrageous, though. Microsoft (MSFT), for reference, trades at 11 times forward sales and is expected to grow revenue at a relatively low rate of 10-15% per year going forward.

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