US Market

Palantir $PLTR Q3 2021 Earnings – Going Mainstream

Calvin Lo

From the recent price action on Palantir Technologies (PTLR) stock, it seems that investors weren’t impressed at all with their Q3 earnings.

Palantir reported a 36% YoY revenue growth to $392M, which I thought was pretty good. Revenue and EPS also came in slightly above analyst estimates.

However, PLTR stock was pummelled post-earnings. The stock dropped 9% the day after and is now trading around 20% down at $21.11 (as of 24th November close).

You can read the Q3 2021 earnings press release here.

So what went wrong with Palantir earnings?

I’ve been scouring the internet for an answer, but I wasn’t able to find a convincing one.

Maybe investors were expecting stronger revenue growth of >40%. Or maybe they were disappointed with slowing government revenue growth. Or maybe they didn’t like how COO Shyam Sankar handled the questions posed during the conference call. Or maybe they finally realised how high valuations are (but not sure why they didn’t realise this sooner).

Of course, the spectre of higher interest rates on a macro level might have played a big part in deflating valuations too. Palantir after all is valued pretty richly at 29x P/S TTM, so it’s pretty much priced for perfection.

My gut feel is that investors are losing patience with PLTR stock. Although Palantir is making good headway in the commercial segment, but maybe it just wasn’t mind-blowing enough. In Q3, Palantir gaining 34 net new customers, grew commercial count grew 46% QoQ and grew US commercial revenue by 103% YoY.

Still a lot to be bullish about

For long-term investors, there’s a lot to like about this earnings report. Although Palantir is still posting losses at the net level, the company has turned positive on an operational level. Cash flow from operations was $101M (26% margin) and adjusted FCF was $119M (30% margin). Note: Adjusted essentially means excluding stock-based compensation.

Personally, my biggest takeaway from this earnings was that Palantir’s commercial business is accelerating. Should this trend continue, Palantir might soon go mainstream and become a ubiquitous enterprise data analytics software. If we think back to why Palantir went public in the first place, it was because they felt that their Foundry product was ready for the mass market. So in my mind, the investment thesis for Palantir remains firmly intact.

Is Palantir stock too expensive?

In my opinion, the main concern with Palantir is its stock price and valuation. As inflation picks up and the Fed starts to raise interest rates, growth stocks like Palantir will inevitably get hit as their future revenue gets discounted more heavily. If the multiple expansion we saw in the last 1.5 years after the pandemic hit reverses, PLTR stock might continue to be rangebound or decline to more normalised valuations.

Another concern I’ve read is around the dilution existing shareholders suffer from as Palantir continues to compensate their employees with stock. But to me, this argument doesn’t make sense. The aim of stock-based compensation is so that employees have skin in the game and hope that in turn they will do what’s best for the company. Since employees are also shareholders, they would be diluted too. So it’s against Palantir’s interest to excessively dilute existing shareholders anyway. Oh well, maybe I just don’t have full appreciation of the issue.

Closing thoughts

That said, I’m still very much bullish on Palantir. My conviction mainly stems from a minor touchpoint with Palantir in one of my previous jobs. If you follow Palantir, you might know that powers the Airbus Skywise platform. More info here. Suffice to say that I was impressed with what Palantir and Skywise could do.

So I’m very much in the Palantir bull camp. Full disclosure, I bough more PLTR stock at around $21. Tipranks.com has PT for PLTR at $23.14 (9.6% upside), but my personal PT is around $30. But who knows, with such a secretive company not well understood by most investors (including myself), looking at valuations might prove futile. As investors, we can only focus on the business and build our conviction in the company through research.

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Disclosure: I’m long PLTR

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