Palantir reported first quarter revenue of $884mn ($863mn expected), up 39% year-over-year and 7% quarter-over-quarter. Performance was driven by its US businesses, both commercial and government.
Underlying operating income rose 73% to $391mn. Free cash flow more than doubled to $304mn and net cash, including leases, was £5.2bn at period end.
For the coming quarter, Palantir expects revenue to land between $934-938mn, with underlying operating income of $401-405mn. For the full year, revenue is now expected around $3.9bn (previously $3.75bn), with underlying operating income of around $1.7bn.
The shares fell 9.3% in after-hours trading.
Our view
Palantir has once again delivered an exceptional quarter. But when expectations are so high, earnings beats and raised guidance aren’t enough to keep markets happy.
Palantir builds software to help businesses and government agencies (primarily in the US) analyse data and make better decisions using artificial intelligence (AI). It has two main platforms: Gotham, which helps government agencies like the military and police, and Foundry, which is used by businesses in healthcare, finance, and other industries.
Palantir’s software gathers and organizes large amounts of data, making it easier to find patterns and predict future trends. One of its key features is what it calls the ‘ontology framework’, which connects different pieces of information to uncover hidden relationships. This helps organizations improve efficiency and make smarter decisions.
AI has helped Palantir significantly improve the value of its product, and its new AI Platform enables the integration of large language models into its existing Gotham and Foundry platforms. Once customers are ensnared in the Palantir world, it’s very hard to give up the data insights and get out of its web, making revenue very sticky.
Palantir has made significant strides with bootcamps, in a similar fashion to Salesforce, to act as touch points with clients where it can demonstrate the value of its product. But it’s not always easy to win big contracts as a data analysis business, the sales process can be long and complicated.
Moving to the fundamentals. Revenue, profit and cash flows are all booming. The US market is an especially promising area and we’re seeing a surge in both commercial and government contracts. We think the commercial side is especially important for the Palantir growth story and where investors should be focusing their attention – this is where the new and massive addressable market exists.
Now to the elephant in the room, the valuation. There’s a valid argument that traditional metrics go out the window when companies are redefining their addressable markets. But even so, caution is warranted. Profits need to consistently, and significantly, outperform expectations to make the valuation look remotely reasonable. Not an impossible feat, but a serious challenge to be wary of.
All in, Palantir is positioning itself as a leader in terms of using data and AI to deliver real world benefits to both government agencies and private companies. But despite our believe that growth will continue to be strong, the sky-high valuation means we see potential for significant volatility and limited upside.
Environmental, social and governance (ESG) risks
The technology sector is generally medium/low risk in terms of ESG, though some segments are more exposed, like Electronic Components (environmental risks) and data monetisers (social risks). Business ethics tend to be a material risk within the tech sector, ranging from anti-competitive practices to intellectual property rights. Other key risks include labour relations, data privacy, product governance and resource use.
According to Sustainalytics, the company's overall management of material ESG issues is average.
The company’s executive pay isn’t tied to ESG targets, and its board committee only oversees governance. It also lacks an environmental policy and recent ESG reports, but it does have a whistleblower program in place. Palantir’s three co-founders have control over the company through a complex share structure, this reduces the impact that ordinary shareholders can have and is a risk to note.
Palantir key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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