Why I'm Adding More Palantir Before Earnings.
Summary
Palantir reports earnings next week, and I expect a beat on both revenue and EPS.
The company has been improving its margins, which will be showcased again next week.
Palantir is creating a moat around its business and is enlarging its Target Addressable Market.
Thesis Summary
Palantir Technologies (PLTR) shares have trading flat for over a month now, making many impatient owners question their investment. However, with earnings due next week, I feel like this is a good time to add to my position. Various factors have come into play in the last few months which the earnings will bring forward. This will make investors look at Palantir in a different light and realize its full potential.
Expecting an Earnings Beat
After the last earnings report, Palantir’s stock fell, despite beating on revenue and earnings. Some say that the forward guidance given was disappointing. For the upcoming quarter, revenue is expected to be $332.31 million, a 38% YoY increase. On the earnings front, Palantir is expected to deliver $0.04 per share. There are a few key reasons why I think that Palantir will beat these estimates.
Firstly, as mentioned above, Palantir gave conservative guidance in their last earnings call. I think this was done deliberately to set lower expectations. I believe the company should easily surpass 40% revenue growth and, if anything, this will accelerate in the future. It seems like every other day we get news of Palantir acquiring new contracts, the latest of which includes a $32.5 million contract with the Air Force.
It would seem though, that I am not the only one expecting good earnings and a better stock performance from here on out. It looks like institutional investors have taken this opportunity in the last few days to initiate or add to their positions in Palantir.
Looking at the 13F filings, it is clear that the trend is moving towards institutions buying shares of Palantir. And of course, we know Cathie Woods has also added more Palantir this week. According to Fintel, institutions now hold around 19% of outstanding shares.
Margins, margins, margins
Of course, revenues are just half of the equation. Most Palantir bears point to the fact that the company isn’t profitable, but this is not necessarily true, depending on how you measure profitability. Furthermore, we have already seen some great improvements in profitability in the last year, and this is surely where the focus will be in the upcoming earnings call. If things keep moving in the direction they have been, we should see a pleasant surprise.
In the last earnings presentation, we saw very encouraging growth in both gross margins and contribution margins, which can be attributed to a few factors. Firstly, revenue per client has increased dramatically. The average revenue per customer increased 41% from 2019 to 2020. On top of that, the company has been able to reduce its deployment times, which has helped reduce costs and increase profitability.
Most encouraging is the fact that the company achieved this operating leverage in all phases of its business. These metrics will be scrutinized during the next earnings call, but there is no reason to believe they should move in another direction. Palantir has been able to achieve operating leverage and is successfully helping its customers grow.
Creating a moat in a Growing TAM
Last, but certainly not least, Palantir is positioning itself incredibly well for the coming years and even decades. The business of data analytics is growing fast, and this isn’t just limited to government contracts. The private sector is increasingly turning towards Palantir and other similar companies to improve their performance. I was impressed by the use cases that Palantir put forward during its Double Click event. In it, the company went into specifics of how its technology could improve supply chains, industrial production and even the R&D process in pretty much any field.
In other words, what we have is a company that is actively expanding its target addressable market. Many investors mention that Palantir has been around for years, never turning a profit and with few clients, but this leads me to ask: Why did the company decide to IPO now? It seems quite clear to me that, since its foundation, Palantir has been a company that is ahead of the market. For the most part, companies don’t go to Palantir asking for a specific service, they go to Palantir and ask them what they can do for them. Palantir then invests time into getting to know its clients to maximize what their software and AI can do for them.
The point is, that Palantir’s technology is ahead of the curve, but this curve is catching up, which I think answers the question of why Palantir decided to IPO last year. In the next few years, we will see more and more companies become interested in what data can do for them. We will see more companies enter the space trying to provide solutions, but it will be too late. Because Palantir has already been doing this for years because Palantir has been working closely with all its clients, and because Palantir has the best technology. Inherently, all of these things are creating a moat around the company’s business. Once they start using Foundry, or Gotham, these businesses and institutions won’t be able to stop. This will become even more true if, as discussed by fellow SA Contributor Vincent Ventures, the company starts offering Foundry for free.
Takeaway
Palantir certainly holds a lot of potential, and at today’s price, the downside seems quite limited. Data and analytics will be one of the highest growth segments of the future and, in my opinion, it holds much more promise than EVs or renewable energies, because these are actual services that will make the economy more efficient. We see proof of this in Palantir’s revenue per client and the fact that they keep getting more government contracts. In the next few years, I expect both profitability and growth to pick up. By that point, it will be clear to everyone what a great company Palantir is, and for investors willing to be patient, it will be time to reap the rewards.
https://seekingalpha.com/article/4425284-why-adding-palantir-earnings
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