Palantir Proves Solutions Are Resonating, Growth Ahead

We are raising our fair value estimate for narrow-moat Palantir Technologies PLTR to $25 from $24 after its first-quarter results left us more bullish about its long-term prospects. While we do not expect GAAP profitability for years, we believe Palantir is prudently investing in ramping up its business to land a wider breadth of organizations from various industries, sizes, and geographic locations. Palantir constitutes a minuscule amount of overall U.S. defense spending and has an embryonic commercial customer base; however, once Palantir's solutions are installed, we believe organizations can become reliant on its products. With shares trading around $19 in intraday trading, we believe investors have upside to capture in this disruptor. Palantir's revenue growth of 49% year over year topped our already aggressive expectations, thanks to resounding results in the government vertical and strong broad-based expansion within the U.S. Government revenue was the bright spot, growing 76% year over year. U.S. government business grew by 83%, led by defense and pandemic-related use cases. We do not believe Palantir's non-defense government segment will fizzle out after businesses reopen, as we think the company is proving its software capabilities during a time of crisis, which can open the door and lead to proliferation across other government entities working to harness their data. Commercial sales rose 19% and were impacted by certain geography lockdowns, although U.S.-based commercial growth increased 72% year over year. With Palantir's push to modularize its offerings and expand its sales reach, commercial opportunities within the U.S. and U.K. increased by 2.5 times and commercial pilots more than doubled since February. Alongside the strong top-line results and expectations of continued strength ahead, Palantir also posted 34% adjusted operating margin (up 200 basis points sequentially) and 44% adjusted free cash flow margin.

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