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One of the most popular stocks in the AI (artificial intelligence) space is Palantir (PLTR). Shares of this tech stock have more than doubled year-to-date, easily outpacing the S&P 500 ($SPX) and the Nasdaq 100 ($IUXX). However, Palantir stock is still trading 65% below the $45 all-time high it hit in January 2021.
What Does Palantir Do?
Founded in 2003, Palantir builds software that enables organizations to integrate their data and operations at scale. It initially developed solutions to assist U.S. government agencies in counterterrorism investigations. Later, it expanded these services to commercial enterprises, further diversifying its revenue base.
The company has built three principal software platforms that include Gotham, Foundry, and Apollo. Gotham provides insights for global defense agencies, while Foundry is a central operating system used across industries. Apollo is a cloud-based product that allows customers to run software in any environment.
Palantir is now in the process of developing the AIP, or Artificial Intelligence Platform, designed for commercial and government enterprises. The AIP allows users to integrate large language models with their data and operations to facilitate decision-making.
Palantir charges a fee to customers that use its robust platforms, allowing the company to end Q1 of 2023 with sales of $525.2 million, an increase of 18% year over year. Its gross profit stood at $417.5 million, indicating a margin of 80%, while adjusted operating income was $125.1 million.
What Impacted Palantir Sales in Q1 of 2023?
A key revenue driver for Palantir is the number of customers it can successfully onboard and retain. It ended Q1 with 391 customers, up from 277 customers in the year-ago period. But due to a sluggish macro-environment and lower enterprise spending, the average revenue per customer fell from $1.61 million to $1.34 million in this period.
The average revenue for its 20 top customers stood at $50.9 million, an increase of 14% year over year, demonstrating Palantir’s ability to expand relationships with existing customers. Palantir closed 64 deals worth $1 million in the March quarter. Around 22 deals were over $5 million, and eight were over $10 million.
Palantir generates 55% of its sales from government customers and the rest from the commercial vertical. Moreover, 64% of sales were derived from the U.S. and the rest from international markets.
Palantir expects U.S. customers to be a significant source of top-line growth. Additionally, revenue from the government sector should remain resilient even during periods of economic uncertainty.
Despite rising costs and elevated inflation levels in the last 15 months, Palantir reported a GAAP (generally accepted accounting principles) income from operations of $4.1 million in Q1, compared to a loss of $39.4 million in the last year. Its adjusted free cash flow also rose from $30 million to $189 million in this period.
Palantir emphasized it would report a GAAP net income in each of the four quarters in 2023, which contributed to the uptick in share prices.
What Next for Palantir Stock Price and Investors?
Valued at a market cap of $28.9 billion, PLTR is armed with a debt-free balance sheet and almost $3 billion in cash, which allows the company to be flexible enough to reinvest in organic growth or pursue accretive acquisitions. It forecasts sales between $2.185 billion and $2.235 billion in 2023, with operating income projected between $506 million and $556 million.
Analysts expect the company’s bottom line to improve from a loss of $0.06 per share in 2022 to earnings of $0.10 per share in 2024. So, PLTR stock is priced at 13.2x forward sales and 130x forward earnings, which is quite steep.
Around a year back, Palantir estimated sales to grow by 30% annually through 2025. But in 2022, its sales were up 24% and are on track to increase by “just” 16% this year. Wall Street, though expects sales growth to accelerate by 19% in 2024, which is still much lower than Palantir’s forecast.
In case Palantir can maintain its lofty price-to-sales valuation and if market sentiment improves, the stock should gain about 20% in the next 12 months. Analysts, however, expect shares to move lower by more than 50%, as seen in the above table.
Where is PLTR Headed From Here?
Like most AI-powered stocks, Palantir has been on an absolute tear in 2023. But it remains a high-risk bet due to a challenging macro-environment and its steep valuation. While government contracts provide investors with better revenue visibility, there is a lot of uncertainty when it comes to department budgets, policy changes, and spending flexibility.
Wall Street analysts are mixed as to where the stock goes from here. Out of the 11 analysts that cover the stock, 2 have Strong Buy Rating, 5 have a Hold, and 4 have a Strong Sell. In the past few weeks, an analyst at Credit Suisse reiterated its Hold rating and set a price target of $11, which is 19% lower than where the stock closed last Friday. And a Raymond James analyst removed the stock from its Favorites List, though they have a $15 price target for the stock which is almost 10% higher than where the stock is currently trading.
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