💥 PLTR Stock Crashing! Q3 Earnings News for Palantir Stock

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Wow, earnings season is always brutal. Palantir's earnings call was earlier today and even though
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they beat analyst expectations for earnings per share and revenue, the stock dropped close
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to 10% right at market open. As of yesterday's market close, Palantir is still ARK Invest's
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13th biggest position overall with over $850 million dollars in it. We'll know tomorrow
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whether or not they bought this 10% dip or if something in their long-term outlook on
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the stock has changed. I'm trying to cover a few of my high conviction stocks more closely,
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so in this episode I'll give you the highlights of Palantir's earnings call and whether my
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outlook on the stock has changed. Spoiler alert: it hasn't. BUT some of the financials
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did change so we should talk about them. Your time is valuable, so let's get right into
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it, starting with the good stuff.
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Palantir's total revenue for the quarter grew by 36% year over year to $392 million dollars.
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Commercial revenue growth has also grown by that amount, which is great to see. Commercial
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revenue in the US specifically more than doubled year over year, so they're getting a lot of
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business on the commercial side here at home. To me, this is great news because one of the
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biggest complaints about Palantir as an investment is their reliance on government contracts.
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Seeing their US commercial revenue double should alleviate at least some of those concerns.
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The customer count on the commercial side grew 46% quarter over quarter. Not year over
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year, quarter over quarter. Their total commercial customer count has gone up by a whopping 135%
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since the start of the year. They netted more new customers this quarter than in the previous
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2 quarters combined. The other big complaint about Palantir is that it's enterprise software,
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so its total addressable market is limited to agencies on the government side and big
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Fortune 500 type companies on the commercial side. In addition to being a flexible platform
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that works with everything from cryptocurrencies and pharmaceuticals to robots racecars, investors
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want to see that Palantir's Foundry is a scalable platform that can work with companies that
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have dozens of employees, not just thousands. As I said, their commercial revenue grew by
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37% year over year. Their customer count growing faster than their commercial deal value tells
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me that they're landing smaller commercial clients, which is exactly what we want to
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see because it means they're starting to move down-market to medium-sized businesses. That
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increases their total addressable market.
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Palantir has a land-and-expand model, meaning their average revenue per existing customer
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goes up over time. In fact, the average revenue on their 20 biggest customers is up 35% year
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over year. That's huge. So it's also great to see them take that to its logical conclusion
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and help businesses build on top of Foundry from the beginning, which means their revenue
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can grow alongside these customers from inception. This also makes Palantir very sticky because
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if a business builds their entire data pipeline on top of Foundry, it'll be very costly and
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time-consuming to switch to different software. In my opinion, all of these are positive things
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associated with Palantir moving into markets with medium-sized businesses, even if this
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causes their average size per deal to go down in the short term. They closed 8 fewer deals
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over 1 million dollars than last quarter, but roughly the same amount of bigger deals
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over 5 million dollars as last quarter. Their total remaining deal value grew by 50% to
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3.6 billion dollars. That means they have 3.6 billion dollars in signed business they
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have to execute on even if they don't sign one more new contract.
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For example, at the start of the quarter, Palantir announced that it has been selected
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by the U.S. Army’s Program Manager for Intelligence Systems and Analytics to deliver the Army’s
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Intelligence data fabric and analytics foundation for the Capability Drop 2 (CD-2) program.
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Palantir was selected to progress to the next phase of the Army’s competitive $823 million
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dollar I D I Q contract. I D I Q stands for indefinite-delivery, indefinite-quantity.
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Palantir will deploy the Palantir Gotham Platform to support Army Intelligence users worldwide
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with a globally federated Intelligence data fabric and analytics platform spanning multiple
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security classifications. So, let me point out two things here. One, having one platform
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that supports a worldwide list of Army users that spans multiple classifications is a very,
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VERY difficult challenge, because different areas of the Army have different ways of handling
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their access lists, networks, data, and have a wide variety of analytics tools. You'd think
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everything would be standardized everywhere and work the same way, and that's probably
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true on paper, but it never works that way in practice. Plugging the U.S. Army's Intelligence
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Systems and Analytics into Palantir's Gotham will bring this part of the Army a lot closer
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to having that unified, consistent view of all of their data, which is obviously super
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important when you're talking about multiple teams stationed around the world.
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Second, I'm willing to bet that Palantir was selected at least in part because of Apollo,
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the platform that powers their other platforms. Apollo sits between Palantir's other applications
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and the underlying infrastructure they run on, and they spent a good amount of their
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earnings call talking about it. Apollo lets Palantir push the right updates to the right
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clients at the right times, even if the client's machines are sitting on classified networks
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or networks that don't touch the internet. I cannot emphasize enough how big of a market
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Apollo unlocks for Palantir that other software-as-a-service providers simply cannot touch. Apollo is what
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allows Palantir to be one of five companies authorized for Mission Critical National Security
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Systems (Impact Level 5) by the U.S. Department of Defense. The other four companies are Oracle,
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Microsoft, Project Hosts, and DISA – the Defense Information Systems Agency. This is a tiny
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list. Think about how sticky that makes Palantir on the government side as well — if this
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part of the US Army decides they want to try a new platform, imagine the amount of infrastructure
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and software they'll have to change to do it, just like the smaller companies on the
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commercial side. I'm excited to track the progress of the IDIQ program and Capability
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Drop 2 over time because the news on these programs could highlight more and more differentiators
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that allow Palantir to get in with other big companies and programs over time.
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So, why did the stock drop 10% after this awesome earnings call? Well, for two pretty
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valid reasons actually. One thing people are pointing to right now is Palantir's slowing
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revenue growth rate. Government revenue grew by 34% year over year but last quarter, it
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grew by 66%. I'm not saying I have the answer, but let me point out two big factors here.
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People graduate school, including grad school, in May and typically take the summer off before
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starting their careers. So, the government typically makes a lot more new hires in July
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and August, which eats into their budget. Speaking of government budgets, the other
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thing to consider is that the government's fiscal year is the start of October to the
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end of September, not from January to December. So, quarter 3, which runs right up to the
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end of September, could be adversely affected by these end-of-budget type issues. I'm not
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saying that's the answer, but I am saying let's see if growth on the government side
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stays down next quarter, which would be during the new fiscal year on the government side.
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The other thing people are pointing to is operating margin, which is Palantir's profit
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after operational costs like wages. Palantir guided to an operating margin of 22%, where
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analysts expected 24%. 22 over 24 is about an 8% difference, which is roughly the same
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amount the stock price has dropped by. Palantir hired a lot of people this year. They drastically
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increased marketing their spend this year. The amount of new sales they plan on making
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per existing customer is expected to drop next year, which makes sense — at some point,
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every customer won't have any new business for Palantir that they didn't already get.
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So now the pressure is on Palantir to turn those extra marketing and salary costs into
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even more profits from NEW customers as their biggest old ones get saturated. One other
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thing I want to point out is Palantir's stock-based compensation. Stock-based compensation is
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down about 40% using year-to-date numbers from this year versus 2020. For just the quarter,
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it's down from 847 million dollars in Q3 of 2020, to 185 million dollars in Q3 of 2021.
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That's about an 80% drop. Compensating employees with stock is a great way to keep their incentives
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aligned with shareholders AND to keep them motivated to perform, so we don't ever want
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to see this number hit zero, but it's great to see it's much lower than before.
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Okay, with all that context, here's why I think the stock price dropped. This is the
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big question at the heart of the bear thesis on Palantir: will all of this hiring, marketing
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spend, and stock-based compensation continue to eat into their profits as they start to
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run out of new work from their biggest existing clients? Will they be able to find new clients
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of the same size, especially on the government side, or are they going to have to keep moving
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down the commercial markets and winning a lot more but smaller clients as a result?
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I think those questions make for a really fair, well-defined bear thesis that investors
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should keep tabs on over time. Comment below or tweet me at Ticker Symbol YOU with your
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thoughts on Palantir's earnings call. What do you think about their relative growth rate
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and margins? Are you surprised that their stock shot down 10% even though they beat
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analyst expectations for earnings per share and revenue? As for me, I'm excited to look
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at ARK Invest's trading data tomorrow morning to see if Cathie Wood bought this dip. I'm
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just as bullish on the company because I do think they'll be able to land clients in a
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wide variety of new markets like connected automotive, industrial robotics, and even
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cryptocurrency and other services built on blockchain technology. Not only that, but
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I believe that Palantir's Foundry platform will be able to scale down to medium-sized
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businesses, as they've shown us with the Foundry for builders program. That's why I bought
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the dip myself and Palantir is now the 5th biggest position in my 100,000 dollar portfolio
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on Public dot com. I'm building that portfolio from scratch to compete directly with ARKK,
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ARK Invest's flagship innovation fund, which also holds a lot of Palantir stock. I hope
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to run this investing project for the next 5 years, or as long as it takes for me to
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