Leading Palantir Price Target as AI Firm Becomes 'Indispensable'
Palantir shares sold off severely after a better-than-spectacular quarter and we're adding at this level.
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On Monday evening, long-time Sarge-fave and core holding Palantir Technologies PLTR released the firm's first quarter financial results.
For the three-month period ended March 31, Palantir posted an adjusted EPS of $0.13 (meeting expectations), a GAAP EPS of $0.08 (beating Wall Street by a penny) and revenue of $883.855 million. The revenue print also beat expectations, while reflecting year-over-year growth of 39.3%.
The quarter reported was better than spectacular in my admittedly biased opinion. Yes, the shares sold off severely overnight. That was not to be unexpected as the stocks had been up 88% in about a month's time coming into Monday trade. This was why I wrote last Friday's piece encouraging at least some token profit taking ahead of earnings once my former target price of $122 had been pierced from below. That's called "target price discipline" and it is a key component of overall risk management for equity market investors.
The Rundown
- U.S. revenue grew 55% to $628 million
- U.S. commercial revenue grew 71% to $255 million
- U.S. government revenue grew 45% to $373 million
- U.S. commercial remaining deal value increased 127% to $2.32 billion
- Q1 U.S. commercial total contract value grew 183% to $810 million
- Closed 139 deals of at least $1 million, 51 deals of at least $5 million and 31 deals of at least $10 million
- Customer count grew 39% from the year-ago comparison
- "Rule of 40" score of 83. For novices, the "Rule of 40" states that for growth corporations to be considered "on track" a company's sales growth plus profit margin should reach or exceed 40. Palantir is simply breaking the mold for what is or was considered to be the benchmark for a successful growth stock.
Operations
For the quarter reported, Palantir generated revenue of $883.855 million (+39.3%). The cost of those sales increased 48.8% to $172.97 million. This left a gross profit of $710.885 million (+37.2%) as gross margin dropped from 81.7% to 80.4%. Total GAAP operating expenses grew 22.3% to $534.837 million, leaving a GAAP operating income of $176.048 million (+117.7%) as GAAP operating margin improved all the way from 12.8% to 19.9%.
Once adjusted, operating income improved by 72.5% to $390.71 million as operating margin improved from 36% to 44%. After accounting for interest, taxes and other income and expenses, GAAP net income printed at $217.717 million, which was up 105.3% from the year-ago comp. This works out to a $0.08 per fully diluted share, up from $0.04 a year ago. Adjusted, earnings per fully diluted share improved to $0.13, up from $0.08 a year ago.
Adjustments were made primarily for stock-based compensation, and employer payroll taxes related to stock-based compensation partially offset by income tax effects and other adjustments.
Fundamentals
For the period, Palantir generated operating cash flow of $310.263 million (+139.4%). Add to that number cash paid for those employer payroll taxes related to stock-based compensation of $66.298 million and subtract capex spending of $6.184 million. The firm is left with free cash flow of $370.377 million (+149.2%). The firm did repurchase $17.998 million worth of common stock during the quarter.
Glancing at the balanced sheet, Palantir ended the quarter with a cash position of $5.431 billion and current assets of $6.283 billion. Current liabilities add up to $967.443 million, including deferred revenue of $318.556 million. There is no short-term debt on the books. That puts the firm's current ratio at 6.49, adjustable to 9.68 to account for those deferred revenues that are not true financial obligations. These ratios are amazing, just as an FYI for those new to balance sheets. Many firms struggle to maintain ratios above one. Anything above 1.5 is considered quite robust.
Total assets amount to $6.737 billion. The firm claims no value for anything intangible. Total liabilities less equity comes to $1.218 billion, which includes some more deferred revenue, but no long-term debt. That's right, the firm has almost $5.5 billion in cash and absolutely no debt load. I used to write that Palantir had one of the strongest balance sheets that I had ever seen for a small firm. They are no longer a small firm. This is one of the strongest balance sheets I have ever seen. Period.
Wall Street
- Dan Ives of Wedbush, who is again rated at four stars at TipRanks now that many of his stocks have made nice comebacks, increased his target price for PLTR to $140 from $120, while maintaining a "buy" rating.
- Mark Schappel of Loop Capital, who is rated at 4.5 stars at TipRanks, increased his target price to $130 from $125, while maintaining his "buy" rating.
- Gregg Moskowitz of Mizuho Securities, who is rated at four stars at TipRanks, increased his target price to $94 from $80, while maintaining his "sell" rating.
- Brad Zelnick of Deutsche Bank, who is rated at five stars at TipRanks, increased his target price to $80 from $50, while maintaining his "sell" rating.
My Thoughts
Regular readers are aware and new readers should be, that while this is a core name for us, we wrote a piece on Friday encouraging at least some profit taking ahead of the numbers as PLTR had broken through our then $122 target price. We then increased our target price to a still Wall Street high $153.
Readers will see that our double-bottom pattern of bullish reversal from back in April worked like a charm. Tuesday's price action likely puts an end to the market reaction to that pattern. As I did when the stock sold off in early April, we will look to add more shares on weakness than we took profits on ahead of the sell off. That's what we did ahead of that earlier sell-off, that's what we'll do now. We sold shares at $113-plus and purchased shares from $102 down to $68 then.
On Friday, we sold shares at an average price of $123.12. Now, we try to find a sweet spot where we can start to scale the stock in, should this bout of profit taking on stellar earnings persist. For those who will claim that the stock is expensive, I won't argue. It is.
That said, the fact is that the firm is without peers, maybe Snowflake SNOW is in the game, but not truly close to being competitive. On top of that, performance is more than doubling the "Rule of 40" score considered hot for growth stocks, free cash flow is growing exponentially and the balance sheet is in a class of its own.
Palantir is executing at a higher level than is everyone else and has prepared fundamentally to weather any rough spots that might arise, while becoming indispensable to the Department of Defense and to Corporate America as its AI services become exactly what is needed in order to remain elite from an analytical perspective.
Palantir Technologies (PLTR)
Target Price: $153 (reiteration)
Pivot: $125 (February top)
Add: From the 21-day EMA down to 50-day SMA (in other words, starting around here)
Panic: Loss of 200-day SMA (currently $64.40)
At the time of publication, Guilfoyle was long PLTR equity.
