Palantir’s Commercial Strength Accelerates Q2 Growth

We are raising our fair value estimate for narrow-moat Palantir Technologies PLTR to $28 from $25, based on higher growth expectations after its second-quarter results topped our expectations for revenue growth and adjusted earnings. Strong growth and heavy sales and marketing investments are expected to continue in the third quarter, and Palantir doubled its previously guided adjusted free cash flow for 2021 to at least $300 million. We believe the concerted efforts in ramping up the salesforce and channel partners are gaining traction, and nice customer count additions in the quarter showcase Palantir lowering the barriers to product adoption. We think Palantir is uniquely positioned to help solve complex data integration and analytics challenges and is in the early stages of scaling its solutions across industries. Shares increased by more than 10% after the strong results, and we view shares as slightly undervalued.

Revenue growth of 49% year over year was led by the government vertical expanding by 66% and the commercial segment growing by 29%. Total contract value booked in the quarter grew by 175% year over year to $925 million, which we believe indicates robust visibility into continued sales strength. The usual suspects, such as the U.S. Army, Air Force, and Coast Guard posted large deal sizes again, but we believe Palantir showed some nice government diversification with wins with the Federal Aviation Administration, Health and Human Services, the Center for Disease Control, and international efforts. Although government continues to be the majority revenue contributor at 62% of sales, we believe the accelerated momentum in commercial is key to the long-term opportunity for Palantir. The company added 20 new customers in the quarter, with commercial customers up 61% since the end of 2020, which we view as a testament of sales investments taking hold and the modular approach with Foundry archetypes helping customers more easily adopt the software.

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