$PLTR Bull Thesis 03 – Great Financials
Wow, earnings season is always brutal. Palantir's ($PLTR) earnings call was yesterday and even though they beat analyst expectations for earnings per share and revenue, the stock dropped close to 10% right at market open. As of yesterday's market close, Palantir is still ARK Invest's 14th biggest position overall with over $800 million dollars in it. Some of the financials changed so we should talk about them.
(shown above: ARK Invest's overall position in Palantir by fund – it's in all 6 ARK funds!)
Palantir's total revenue for the quarter grew by 36% year over year to $392 million dollars. Commercial revenue growth has also grown by that amount, which is great to see. Commercial revenue in the US specifically more than doubled year over year, so they're getting a lot of business on the commercial side here at home. To me, this is great news because one of the biggest complaints about Palantir as an investment is their reliance on government contracts. Seeing their US commercial revenue double should alleviate at least some of those concerns.
(source: $PLTR Q3 2021 earnings call 11/09/21)
The customer count on the commercial side grew 46% quarter over quarter. Not year over year, quarter over quarter. Their total commercial customer count has gone up by a whopping 135% since the start of the year. They netted more new customers this quarter than in the previous 2 quarters combined. The other big complaint about Palantir is that it's enterprise software, so its total addressable market is limited to agencies on the government side and big Fortune 500 type companies on the commercial side. In addition to being a flexible platform that works with everything from cryptocurrencies and pharmaceuticals to robots racecars, investors want to see that Palantir's Foundry is a scalable platform that can work with companies that have dozens of employees, not just thousands. Their customer count growing faster than their commercial deal value tells me that they're landing smaller commercial clients, which is exactly what we want to see because it means they're starting to move down-market to medium-sized businesses. That increases their total addressable market.
(source: $PLTR Q3 2021 earnings call 11/09/21)
Palantir has a land-and-expand model, meaning their average revenue per existing customer goes up over time. In fact, the average revenue on their 20 biggest customers is up 35% year over year. That's huge. So it's also great to see them take that to its logical conclusion and help businesses build on top of Foundry from the beginning, which means their revenue can grow alongside these customers from inception. This also makes Palantir very sticky because if a business builds their entire data pipeline on top of Foundry, it'll be very costly and time-consuming to switch to different software. In my opinion, all of these are positive things associated with Palantir moving into markets with medium-sized businesses, even if this causes their average size per deal to go down in the short term. They closed 8 fewer deals over 1 million dollars than last quarter, but roughly the same amount of bigger deals over 5 million dollars as last quarter. Their total remaining deal value grew by 50% to 3.6 billion dollars. That means they have 3.6 billion dollars in signed business they have to execute on even if they don't sign one more new contract!
(source: $PLTR Q3 2021 earnings call 11/09/21)
So, why did the stock drop 10% after this awesome earnings call? Well, for two pretty valid reasons actually. One thing people are pointing to right now is Palantir's slowing revenue growth rate. Government revenue grew by 34% year over year but last quarter, it grew by 66%. I'm not saying I have the answer, but let me point out two big factors here. People graduate school, including grad school, in May and typically take the summer off before starting their careers. So, the government typically makes a lot more new hires in July and August, which eats into their budget. The other thing to consider is that the government's fiscal year is the start of October to the end of September, not from January to December. Q3, which runs right up to the end of September, could be adversely affected by these end-of-budget type issues. I'm not saying that's the answer, but I am saying let's see if growth on the government side stays down next quarter, which would be during the new fiscal year on the government side.
(source: $PLTR Q3 2021 earnings call 11/09/21)
The other thing people are pointing to is operating margin, which is Palantir's profit after operational costs like wages. Palantir guided to an operating margin of 22%, where analysts expected 24%. 22 over 24 is about an 8% difference, which is roughly the same amount the stock price has dropped by. Palantir hired a lot of people this year. They drastically increased marketing their spend this year. The amount of new sales they plan on making per existing customer is expected to drop next year, which makes sense — at some point, every customer won't have any new business for Palantir that they didn't already get. So now the pressure is on Palantir to turn those extra marketing and salary costs into even more profits from NEW customers as their biggest old ones get saturated.
(source: $PLTR Q3 2021 earnings call 11/09/21)
One other thing I want to point out is Palantir's stock-based compensation. Stock-based compensation is down about 40% using year-to-date numbers from this year versus 2020. For just the quarter, it's down from 847 million dollars in Q3 of 2020, to 185 million dollars in Q3 of 2021. That's about an 80% drop. Compensating employees with stock is a great way to keep their incentives aligned with shareholders AND to keep them motivated to perform, so we don't ever want to see this number hit zero, but it's great to see it's much lower than before.
(source: $PLTR Q3 2021 earnings call 11/09/21)
This is the big question at the heart of the bear thesis on Palantir: will all of this hiring, marketing spend, and stock-based compensation continue to eat into their profits as they start to run out of new work from their biggest existing clients? Will they be able to find new clients of the same size, especially on the government side, or are they going to have to keep moving down the commercial markets and winning a lot more but smaller clients as a result? I think those questions make for a really fair, well-defined bear thesis that investors should keep tabs on over time. Comment below or tweet me at Ticker Symbol YOU with your thoughts on Palantir's earnings call. What do you think about their relative growth rate and margins? Are you surprised that their stock shot down 10% even though they beat analyst expectations for earnings per share and revenue? As for me, I'm excited to look at ARK Invest's trading data tomorrow morning to see if Cathie Wood bought this dip. I'm just as bullish on the company because I do think they'll be able to land clients in a wide variety of new markets like connected automotive, industrial robotics, and even cryptocurrency and other services built on blockchain technology. Not only that, but I believe that Palantir's Foundry platform will be able to scale down to medium-sized businesses, as they've shown us with the Foundry for builders program. That's why I bought the dip myself and Palantir is now the 5th biggest position in my 100,000 dollar portfolio on Public!
Want to learn more about $PLTR and their latest earnings call? Check out my video coverage of it: https://www.youtube.com/watch?v=oScoSEgYDW4
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🙏 Thanks for reading!
⚡ Alex @ TickerSymbolYOU
