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Palantir: Profitability Poised To Explode

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Why Palantir’s Profits Are Set to Skyrocket

Palantir, traded on the NYSE as PLTR, has been performing exceptionally well this year, with its stock surging over 100% year-to-date. The company has achieved positive operating and free cash flow margins, indicating strong financial growth. With a solid balance sheet, Palantir has ample resources for continued innovation and revenue expansion. All key performance metrics demonstrate impressive momentum, supporting my belief that the company has significant potential for increased profitability through cross-selling opportunities. My valuation analysis confirms that the stock remains attractively priced. Therefore, I maintain my “Strong buy” recommendation.

What’s Happening Now

In its most recent earnings report on August 7, Palantir missed revenue expectations, but met bottom-line projections. Year-over-year, revenue grew by almost 13%, and the adjusted EPS turned positive at $0.05 compared to -$0.01 in the same quarter last year.

The most encouraging sign is that the company has achieved positive operating margins for two consecutive quarters. This demonstrates the financial stability of Palantir’s business model, even at a relatively modest scale. Notably, the company’s focus on innovation remains strong, as evidenced by its substantial R&D investment, which accounted for nearly 19% of quarterly revenue. This commitment to innovation bodes well for long-term value creation and shareholder returns.

With nearly $3 billion in net cash and a leverage ratio below 10%, Palantir boasts a robust balance sheet. These liquidity metrics provide the company with ample resources for organic growth and strategic acquisitions.

The upcoming earnings for the next quarter are scheduled to be released on November 7. Consensus estimates project quarterly revenue of $556 million, indicating a strong 16% YoY growth. The adjusted EPS is expected to increase from $0.01 to $0.06, which is a bullish indication.

I remain bullish on Palantir due to its impressive operating metrics. The company’s customer count has grown by 38% YoY, which is a strong signal for investors. With a diverse range of products and modules, Palantir has ample cross-selling and up-selling opportunities, contributing to healthy billings growth and average revenue per top-20 customers. Furthermore, the Big Data Analytics market is expected to expand by 13.5% annually, and Palantir’s strong performance in this sector, combined with its reputable clientele such as the Pentagon, further solidify the company’s prospects.

Valuation Insights

While Palantir’s stock has surged by nearly 140% this year, its multiples are still higher than the sector median, according to Seeking Alpha Quant. However, as an aggressive growth company, Palantir’s valuation warrants a deeper analysis beyond multiples. My discounted cash flow (DCF) model, using a 10% WACC for discounting, indicates a fair value of approximately $40 billion for the business. This assessment implies a potential upside of around 20%, with a target share price of approximately $18.

Understanding the Risks

As an aggressive growth company, Palantir’s valuation is heavily dependent on its ability to deliver strong financial performance aligned with its ambitious plans. Failing to achieve the projected 18% annual revenue growth for the next decade could lead to significant disappointment among investors and a subsequent sell-off. Additionally, temporary earnings misses or guidance downgrades could trigger notable stock market volatility, with potential intraday price declines exceeding 10%. Investors should be prepared for significant stock price fluctuations and acknowledge that recovery may take several quarters or even years.

The ever-evolving technological landscape introduces inherent uncertainty regarding the longevity of any technology. Palantir’s offerings and technologies could be challenged by new approaches and methods, potentially leading to a decline in market share. There is no guarantee that Palantir will respond effectively to disruptive technological trends.

The Bottom Line

To sum up, Palantir remains a “Strong buy” opportunity. The company’s stellar financial performance, robust balance sheet, and promising industry outlook make it an appealing investment choice. Palantir’s growth potential, supported by a growing customer base and significant revenue per customer, reflects exceptional execution and management expertise. Furthermore, my valuation analysis emphasizes the stock’s substantial undervaluation. Therefore, investors should consider seizing this compelling opportunity.

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