Finance

Palantir Stock (NYSE: PLTR): Transformed into a Source of Free Cash Flow


As Palantir (NYSE:PLTR) Shareholders, I couldn’t be happier Soared about 35% after profitThe AI-driven data analytics and intelligence software company impressed investors, highlighting the strong appeal of boot camps, growing AIP (artificial intelligence platform) adoption and rising profits. Management expects continued acceleration in its commercial segment. At the same time, Palantir is gradually transforming into a free cash flow power station.

That said, while I’ll continue to be invested in Palantir’s long-term prospects, I’m now taking a neutral stance after the stock’s sharp rise.

Bootcamp drives explosive business growth

One of the highlights of Palantir’s fourth-quarter report was how the company was able to drive explosive growth in its commercial segment. Simply put, Palantir’s business is divided into two parts: government (bringing in 53% of revenue) and commercial (the remaining 47%). Now, while the government side is still growing quite rapidly, up 11% in the fourth quarter, the real excitement is brewing in Palantir’s commercial side.

In fact, Palantir’s commercial segment far outperformed its government business, with revenue up 32% year over year. This was driven by a significant 55% increase in Palantir’s customer count to 221 companies. The rapid customer success can be attributed to Palantir’s implementation of a highly exemplary customer acquisition strategy called Bootcamp.

What is the training camp about?

Palantir’s Bootcamps are intensive, hands-on workshops designed to showcase the capabilities of its products, specifically Palantir’s AIP.

Palantir’s strategy is essentially to coldly approach CEOs and CTOs, urging them to put their best AI teams to the test. In Palantir terms, this approach typically sounds like this:

Take what you do in AI and get the best people involved and we’ll run your data through a 10-hour bootcamp. Compare your results to our operationally relevant, commercially valuable results. Our 10 hours vs. your 10 hours Any product, supplier or hyperscale supplier you choose, we’ll be there for you.

Fourth Quarter Earnings Conference Call

Sure enough, many executives have expressed interest in trying the Palantir platform, especially given its popularity in the tech world. The surge in demand for these immersive “workshops” has allowed Palantir to not only meet and exceed previous expectations. Since October they have hosted an impressive 560 sessions, a feat that has already surpassed their original goal of 500 sessions in a year.

The impact of training camps on income growth

Palantir’s bootcamp strategy has played a critical role in driving revenue growth across the commercial segment and company-wide. In fact, Palantir’s management emphasized that the company has secured significant deals through this approach. Seeing firsthand the real results that Palantir could bring to their businesses, other business executives were compelled to embrace this transformative technology and realized that this was an opportunity that could not be ignored.

To name a few, Palantir has signed:

  • More than $25 million each, of which

    • One of the largest car rental companies in the world, one of the largest telecommunications companies, and one of the largest pharmaceutical and biotech companies in the world.

  • More than $10 million each, of which

    • a U.S. consumer products holding company, a U.S. auto seat and electrical systems manufacturer, a Midwest general health network and a major battery manufacturer.

  • More than US$5 million each, of which

    • A U.S. bank holding company, a horse racing regulatory organization, one of the world’s largest equipment rental companies and one of the largest independent not-for-profit cooperatives in QSR.

These are just a few examples.

A bar chart from Palantir’s Q4 presentation clearly illustrates Bootcamp’s success in driving commercial customer numbers. Specifically, on a trailing 12-month (TTM) basis, Palantir’s commercial customer count grew 22% sequentially. This represents a staggering acceleration compared to the corresponding figures of 8%, 4% and 12% achieved in Q1, Q2 and Q3 respectively.

With such impressive momentum in Palantir’s commercial customer base, it’s clear that Wall Street may be pricing in accelerated revenue growth in the coming quarters. Palantir management itself confirmed this expectation by providing guidance for fiscal 2024 U.S. commercial revenue of over $640 million. Indicates a growth rate of at least 40%. This further adds to the optimism surrounding the company’s growth trajectory.

Palantir: Generates free cash flow, but valuation concerns arise

Revenue in the government and commercial segments grew strongly 20% to $608 million in the fourth quarter, as Palantir gradually enjoyed improving unit economics and transformed into a free cash flow machine.

To add some color to Palantir’s overall profitability, the company’s adjusted operating margin jumped to 34% in the fourth quarter from 22% in the year-ago period. This marked the fifth consecutive quarter of expansion in adjusted operating margin and the fifth consecutive quarter of positive GAAP net income.

GAAP net income reached $93 million, with a profit margin of 15%. Yes, Palantir is very profitable right now, even on a GAAP basis, and margins are just starting to expand. Of course, that $93 million includes a $44.5 million interest income position from $3.7 billion in cash, but profits are profits, especially considering this is on a GAAP basis.

But let me go back to free cash flow, adjusted free cash flow was $305 million and margin was 50%. Note that this number includes $132.6 million in stock-based compensation (SBC) charges, so it should be taken with a grain of salt. That is to say:

  • a) Even excluding SBC, it represents a massive free cash flow margin of over 25%.

  • b) It shows significant potential for Palantir’s free cash flow to grow as its overall margins expand.

  • c) Total SBC actually decreased year over year in FY23, which is certainly encouraging.

In fact, management’s guidance indicates this potential, as it expects adjusted free cash flow to be in the range of $800 million to $1 billion. I think this estimate is very conservative given Palantir’s admittedly incredible momentum in fiscal 2023 and current margins. Ready to expand from here.

Regardless, even these numbers show how quickly Palantir has transformed into a free cash flow powerhouse. For context, two years ago in fiscal 2022, adjusted free cash flow was just $203 million.

Is Palantir stock too expensive?

Despite Palantir’s operational excellence, it’s hard to ignore that its stock price may have become too high. At 51 times the high end of management’s adjusted free cash flow guidance range for this year, no further evidence is needed that Palantir trades at a huge premium.

While exponential growth over the medium term may ultimately justify paying this multiple today, you should expect significant share price movement. Since the margin of safety is significantly thinner now compared to previous quarters, I have changed my stance on the stock from bullish to neutral.

Do analysts think PLTR stock is a buy?

Wall Street’s current mood appears to be more conservative after the stock’s sharp rally. According to Wall Street, the consensus rating for Palantir Technologies is a Hold, based on 3 buys, 5 holds, and 5 sells over the past three months. The stock price is $18.20.Average PLTR stock price target Showing downside potential of 25.35%.

If you’re wondering which analyst you should follow if you want to buy or sell PLTR stock, the most profitable analyst covering the stock (within a one-year time frame) is Mariana Perez of BofA Securities Mariana Perez), with an average return of 70.89 percent per rating and a 100% success rate. Click on the image below to learn more.

takeout

Palantir’s fourth-quarter results were fueled by its impactful boot camp and growing demand for its products, driving the stock’s impressive gains. As a shareholder, I’m very pleased with the recent gains.

The commercial segment’s impressive revenue growth will accelerate further under management’s guidance. At the same time, Palantir’s free cash flow generation shows huge potential given the company’s high-margin business model. For these reasons, I will continue to hold the stock. In fact, I see Palantir dominating the AI-driven decision-making software space.

However, despite these positive metrics, the stock’s lofty valuation is causing concern. As a shareholder, I remain optimistic about Palantir’s long-term potential, but given the recent surge, I have shifted to a neutral stance, lowering my expectations, and positioning myself for further growth. future volatility.

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