Palantir: Why I’m Increasing My Position (NYSE:PLTR)

Palantir (NYSE:PLTR) – wow, it’s been a ride. The company went public at around $10. However, two and a half years later, its stock is below its IPO price.

Also, let’s get the dilution question out of the way first. Palantir’s market cap was $16.5B when it went public. Now, it’s at around $17.7B today. The market cap increase needs to be more to adjust for the rise in inflation. Despite the wild roller coaster ride, Palantir’s stock is back around where it was when Palantir’s public shares first appeared.

Furthermore, we see that significant post-IPO, like share dilution, ended. The company went public at $10. Now the stock is around $8. Palantir’s valuation is roughly back to its IPO level, while its business has grown significantly in the last few years. Moreover, Palantir’s stock has tremendous potential and should appreciate considerably as we advance.

What Makes Palantir Special

Palantir is a unique, global-leading, monopolistic-style company with enormous long-term growth and profitability potential. Palantir’s impressive combination of government and commercial solutions enables the company to operate in various markets globally.

Yes, some other companies offer similar services. However, none of Palantir’s competitors have the same combination of features that make Palantir so unique. Therefore, Palantir can charge premium prices for its products and services ($141,000 for Gotham). Palantir also is known for its culture of secrecy, talented workforce, and focus on privacy and data security while launching successful technology simultaneously.

Moreover, Palantir can leverage its influence with the government to accumulate even more growth in its commercial businesses. Additionally, Palantir continues innovating and remains the spearhead of its industry. Fortunately, Palantir’s stock price remains depressed and undervalued, making its shares an excellent long-term buy. Palantir’s market cap could be around $30-50B under “normal market conditions.”

Don’t Underestimate The Political Factor

I don’t get into politics much here, but in Palantir’s case, it concerns the company’s financials and future growth and profitability prospects. While Palantir’s government contracts have done well during recent years, they could do even better if a Republican President takes over the White House. Billionaire Peter Thiel, the co-founder of Palantir and PayPal (PYPL), is one of the largest individual donors to the Republican Party. Therefore, Palantir could see a boost to its government sector revenues if a Republican takes power in Washington in the coming years.

Speaking of Profits – Plenty of Them for Palantir

Remarkably, Palantir often gets criticized for making such small profits. However, Palantir is a high-growth company that needs to aim most of its cash flow at expanding operations, hiring and retaining top talent, and growing revenues. There’s no need for a high level of profitability for Palantir now. Nevertheless, the company needs to maintain high growth and illustrate that it can remain highly profitable.

Palantir’s Remarkable Margins

If you want to discuss immense profitability potential, all you have to do is look at Palantir’s excellent margins.

Palantir’s gross profit margin was 79.5% last year! Moreover, if we remove stock-based compensation, the gross profit margin is 81.7%. Palantir’s profitability is astonishingly high, implying that the company can become increasingly profitable by optimizing costs as it continues expanding operations.

Palantir’s Growth Story – Alive And Well

Despite the global slowdown, Palantir’s growth story is alive and well. The company is on the front lines of the war for freedom in Ukraine. There, ruthless Russian forces are leading a relentless terror and destruction campaign the likes of which haven’t been seen since WWII. Nevertheless, heroic Ukrainians defending their homeland are aided by companies like Palantir to gain a significant advantage over their adversary.

Big tech is leading the war, and Palantir is in a prime position to benefit. I’m not talking about just the Ukraine conflict. Still, geopolitical conditions should generally remain stressed for a long time, allowing Palantir to grow and expand on its defense side.

2022 Financial Highlights

Please focus on the most significant number, the massive $421 million adjusted income from operations. This number provides an impressive net income margin potential to continue optimizing in the coming years. Also, U.S. commercial revenue grew substantially to $335 million, a 67% YoY growth. Commercial revenue increased by 29% YoY to $834 million, U.S. revenue increased by 32% to $1.16B, and total revenues came in at $1.91billion, representing 24% YoY growth. While this growth rate is slightly below the 30% growth target, it’s customary to see a modest growth drop during significant economic downturns. Therefore, Palantir’s revenue growth decline is likely transitory. The company should return to a healthier growth rate of 30% or higher as the macroeconomic conditions continue normalizing in the coming months and quarters. Moreover, as the Fed continues pivoting, more money should come into Palantir’s stock, as it’s an excellent investment in a lower interest rate environment (looking ahead now). Continuously, 6-9 months.

The Valuation: Too Cheap To Ignore

Unlike many companies, Palantir beat its most recent earnings report, delivering a GAAP EPS of 1 cent vs. the minus the 3-cent consensus estimate. I may need to be wiser than to count pennies. However, Palantir provides outstanding results even when many mature tech companies cannot. This dynamic illustrates the company’s potential to beat future earnings expectations significantly.

What Downbeat Analysts Expect

Revenue Expectations – Could be too Modest Now

Consensus analyst estimates suggest that Palantir’s revenue growth may be only around 17% this year. However, Palantir could continue outperforming estimates and deliver closer to $2.3-2.4 billion in revenues, approximately 22%-25% YoY growth. Furthermore, Palantir’s growth should improve in future years and could bounce back to around 30% as the company moves on.

EPS Estimates – Robust Growth Ahead

Despite relatively bearish estimates, many analysts still expect significant EPS growth ahead. Consensus estimates suggest that Palantir’s EPS should be 25-35 cents or higher by 2025. While this prognosis appears modest, it implies that Palantir trades at roughly 23-28 times 2025 EPS estimates. Nevertheless, the EPS figure could be lowballed due to recent downgrades, and Palantir’s real EPS could come in at around 40-50 cents in 2025. Achieving better-than-expected growth and achieving faster-than-anticipated profitability should enable Palantir’s shares to move significantly higher in the long term.

Here is where Palantir’s stock could be heading in the coming years:

Click to enlarge

Source: The Financial Prophet

Risks to Palantir

Despite my bullish outlook for Palantir, market participants should consider several potential risks associated with this investment. The company’s earnings are minimal and may not increase as much as I envision. Moreover, if the company’s growth picture were to turn less bullish, the stock could head lower. Also, if Palantir lost favor with the government or had a data breach, the stock could experience a notable decline. So, please carefully consider these and other risks before you invest in Palantir.