Palantir Earnings: Strong Billings Showcase Increased Demand for Firm’s AI Solutions

Palantir Stock at a Glance

• Fair Value Estimate: $11.00
• Morningstar Rating: 2 stars
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow

Palantir Earnings Update

We are raising our fair value estimate for narrow-moat Palantir PLTR to $11 from $9 after the firm reported a strong quarter with improved profitability and particularly strong billings expansion. As we have highlighted previously, we are optimistic about Palantir’s opportunity in both government and commercial markets. We believe the firm’s expertise in artificial intelligence, coupled with its formidable product lineup makes it a leader in the AI platform space.

At the same time, however, despite our estimates being well above consensus for the next three years, we remain unable to rationalize Palantir’s current market valuation. With shares trading around $18 per share, we view them as overvalued and would advise investors to tread with caution as we do not believe the firm’s valuation is backed by strong fundamentals.

Sales Boosted by Increased Interest in AI

Palantir’s sales for the second quarter clocked in at $533 million, up 13% year over year and below our above-consensus estimate of $547 million. We were encouraged to see Palantir report strong forward-looking metrics such as billings. Billings expanded 52% year over year to $603 million (a comparable growth rate for billings was last seen in 2021). We attribute this strong expansion to increased interest in Palantir’s products jump-started by increased customer interest in AI.

Similarly, Palantir’s customer count growth was also robust, with the firm’s total customer count growing 38% year over year to 421. While customer count growth has slowed down over the past few quarters, we were pleased to see the firm continuing to add customers at a fast clip which corroborates management’s commentary on increased adoption of/spending on Palantir’s solutions.

On the profitability front, Palantir’s adjusted operating margins came in at 25%, slightly ahead of our 24% estimate. We believe the firm’s laser focus on profitability, amid its bid to be eligible for inclusion in the S&P 500, is timely as investors key in on margins in a tough macro environment.

Palantir’s Financials Need To Catch Up With Valuations

In our coverage of Palantir, it can be difficult, at times, to separate the wheat from the chaff. We believe management could do more to increase transparency for investors looking at how the business is performing as they look beyond the sound bites peppered throughout management’s commentary on financial results. Relatedly, we were confused by management decision to not disclose the firm’s net retention metric in its prepared remarks/presentation like previous quarters. We’d imagine the firm would use every possible metric to demonstrate increased adoption of its solutions. The net retention metric, in particular, would be helpful as it would highlight Palantir’s ability to drive additional sales from existing customers, with a marked increase possibly attributable to increased adoption of AIP.

On the valuation front, we’d highlight that Palantir’s current enterprise value/sales multiple for 2023 is 17 times. This multiple is based on our above-consensus sales estimate (with the EV/sales multiple based on consensus sales estimate being even higher). To justify its lofty valuation, Palantir’s financials must catch up, as investors are betting on the company’s ability to not only accelerate growth in the upcoming quarters, but also maintain that level of growth for a longer period than previously anticipated.