Palantir Q1 22 – Knock knock!

Getting close to interesting territory.

• Palantir joins the list of companies that report a slight miss that causes a big sell-off in the shares that has another high-flying technology stock knocking on the door of value territory.
• Q1 2022 revenues / EPS were $470m / LOSS$0.05 broadly in line with forecasts of $443m / LOSS$0.05.
• Growth varied widely between government which grew 16% YoY and corporate which grew by 54% to $204.5m in revenues.
• Slowness at government is not a big surprise given how difficult it is to pass spending bills in the USA these days and it is masking faster-than-expected development with corporate customers.
• I think that this is the area where Palantir’s real future lies as the addressable market is much bigger and the margins that can be earned are wider.
• This will be crucial in Palantir’s push to achieve profitability which remains a problem with the company still refusing to be drawn on when it may finally earn some money.
• Also crucial will be the ability to move away from customised offerings and instead migrate products towards being more self-service but this is going to take time.
• Guidance for Q2 2022 was weak with $470m in revenues expected which is up 25% YoY but below the 30% run rate the company has guided for the full year 2022 and the company managed in Q1 2022.
• The company has maintained its 30% or better growth rate for 2022 and for at least the next 2 years so presumably, there is some lumpiness in the revenue that the company can see but is not immediately obvious to outside observers.
• This is what triggered a 21% collapse in the share price a good half of which I think was due to the derating that is going on for highly valued technology stocks of which Palantir is one.
• For example, Airbnb and Peloton fell by 12% and 10% respectively yesterday on no news giving an indication of just how brutal the environment now is.
• While Palantir still loses money at the operating level, crucially it is generating cash meaning that the ship at current levels is stable.
• This is crucial because it will provide management with the confidence that it can continue investing and growing the business.
• Furthermore, almost every corporate I know of that uses Palantir quickly becomes dependent on it, meaning that the offering is very sticky meaning that market share and pricing are unlikely to come under serious pressure.
• That being said, the valuation is not yet what I would describe as unmissable value.
• As of 9^th May 2022, the market capitalisation was $15.0bn with $2.3bn in net cash giving an enterprise value of $12.7bn.
• 2022 revenues should be around $2bn meaning that the company is trading on 2022 EV / Revenues of 6.4x.
• This is about 1/3^rd of the valuation of Snowflake, 60% of the valuation of Microsoft, broadly in line with Oracle but double the valuation of IBM.
• These revenue multiples are clearly skewed greatly by both growth and profitability and Palantir is one of the fastest growers within its peer group.
• That being said, I think the peer group could easily see further weakness which combined with Palantir’s lack of profitability means that the time to buy it is still not here.
• Palantir is running quickly up the list of companies that I am watching carefully for the right time to take a position.