Palantir Technologies Inc (PLTR) USD0.001 A

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Palantir reported third quarter revenue of $1.2bn ($1.1bn expected), up 63% year-over-year and 18% quarter-over-quarter. Performance was driven by its US businesses, both commercial and government.

Underlying operating income more than doubled to $601mn ($501mn expected). Free cash flow rose 24% to $540mn and net cash, including leases, was £6.2bn at period end.

For the coming quarter, Palantir expects revenue of $1.3bn, with underlying operating income of $695-699mn. For the full year, revenue is now expected around $4.4bn (previously: $4.1-4.2bn), with underlying operating income of around $2.2bn.

The shares were down 4.3% in after-hours trading.

Our view

Palantir’s growth continued to impress as the company positions itself as a key enabler for businesses and governments to transform the way they operate. Question marks around the valuation continue to linger, and while we agree to some extent, we think the opportunity at hand is being underestimated.

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 underlying 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 organises large amounts of data, making it easier to find patterns and predict future trends. One of its key features is the so-called ‘ontology framework’, which connects different pieces of data to uncover hidden relationships. This helps organisations 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. Network effects are now acting as demand drivers too, where word of mouth acts as a circular flywheel.

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. 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.

All in, Palantir is positioning itself as a leader in using data and AI to deliver real-world benefits to government agencies and companies. Exceptional performance coupled with a strong AI narrative means sentiment has taken a significant step forward in the past couple of years.

We see scope for longer term upside if growth continues to exceed expectations and sentiment remains strong. But this is a high risk/reward name that will be more exposed than most to a shift in the winds. Investors need to be prepared for more volatility than the average tech name.

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.

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