Summary

• Palantir's Q4 earnings exceeded expectations, showing strong customer growth and operational efficiency, reinforcing the company's potential for future expansion and revenue increases.

• Despite a 75% gain, Palantir still presents scenarios with significant upside, driven by continued dominance and the secular AI trend.

• The stock's current valuation seems high, but holding a small position is justified due to potential upside if Palantir exceeds expectations.

• Maintaining a hold rating, as PLTR's growth prospects and market potential, could lead to substantial returns, albeit with considerable downside risk.

Symbolic representations of good and evil AI morality

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Since my last Palantir (NASDAQ:PLTR) (NEOE:PLTR:CA) analysis, the stock has gained 75%, as my screenshot below shows.

Last Palantir's Article: Potential Upside, But Caution Is Crucial

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On this date, the market cap was ~$150B, and it was still possible to justify upside ahead, but it was necessary to be bullish, believing in a strong expansion of customers and revenue per customer, which eroded the margin of safety leaving little room for error.

When the Q4 earnings came out, I saw the highlights and I liked it a lot, but after the stock continued to rise and reached almost $120 even though it reported an EPS of ~$0.07, it seemed to me that the stock was so overvalued that a sell rating would be appropriate.

But of course, I don't base my ratings and analysis on feeling, so I went to look deeper into the quarter and do my math. As incredible as it may seem, even with the +70% gains it's still possible to find scenarios where there's considerable upside for the stock, of course, considering major operational advances.

Palantir's Q4 Earnings Strengthened Every Assumption I Had

In the table below, are my latest assumptions for Palantir in 2030. These figures were based on the annualized Q3, and of course, also on the company's continued dominance, higher revenue per customer and the like, which were also supported by the secular AI trend.

Palantir's Main Metrics

Palantir, Author (Kênio Fontes)

It turns out that from Q3 to Q4, the company improved all these assumptions above, from adding 73 customers in the commercial segment to expanding Revenue Gov/customer by 4% QoQ. This gives us the possibility of not only relying on the increase in customers that I projected earlier, but even increasing it - we'll go into this in more depth in the next section.

Turning to Q4 earnings, the operating metrics were very positive. The company closed $1.8B of TCV in just one quarter, and this is extremely positive, especially considering the 56% YoY growth of this metric.

This is a clear reflection of a well-delivered, high-quality service, as customers recognize the value of Palantir's tools, such as AIP, in reducing process hours and improving automation and efficiency. The examples in the earnings call also show that this is happening in all industries. From pharmaceuticals to commodities like Rio Tinto (RIO), companies want to become more and more efficient, either by reducing steps in a process, saving costs and expenses and therefore increasing margin, or by using this to produce more and increase revenue.

When Dan Ives asked in the Q4 earnings call if Palantir had been surprised at how fast the sales cycles were, Ryan Taylor (Palantir's Chief Revenue Officer) said no because the company was already seeing how customers were reacting, wanting to start quickly, expand quickly, and that's all "tangible".

"I would say I'm not surprised because of the energy we feel on the ground in talking to customers and the impact. You know, Shyam, shared some examples taking a back office process from the largest banks from five days to under three minutes, taking what used to automating a process for an automotive supplier from what used to take 100 hours to be automated with just a human check and seeing the reactions of those customers when those are implemented and seeing the impact and seeing them wanting to move quickly, seeing them wanting to start quickly, expand quickly, and essentially stay ahead of their competitors like feeling that energy and feeling that reaction on the ground, I'm not surprised because you feel it, it's tangible."

This is very bullish for Palantir, and again, reinforces how the company is able to generate value for the customer, and this should continue to happen. Think about how a peer of a company that uses Palantir's services behaves when notice that their company is falling behind in efficiency. They will want to have access to similar services.

Moving on to the bottom line, Palantir itself continued to advance its internal efficiency, and reported an adjusted operating margin of 45%, the highest in the company's history, as well as over 63% adj. Free Cash Flow margin.

Palantir's Cash Flow

Palantir's Presentation

These figures are very attractive and show the company's profitability capacity, but there is still a lot of SBC involved, and one of the main risks of the thesis is the uncertainty that this SBC will decrease (in relation to operating income) in the future to the point where it will be possible to achieve a free cash flow even if this dilution is removed. FY 2024 operating income was $310 million, and adding more than $700 million related to SBC, we have $1.1B of adj. operating income.

Palantir's SBC

Palantir's Presentation

My New Assumptions For Palantir Stock

In the last analysis, my assumption for Customers Gov was to double, reaching 262 by 2030. I increased it to 280, still considering this potential doubling of partnerships over the next 6 years.

For Customers in the Commercial segment, that's where I improved the most, moving from 1,992 in 2030 to 2,410. 2.4 thousand customers is a lot, but it could still be possible. In Q4, the company added 82 new customers in total. If we think of this as a megatrend and Palantir manages to sustain this pace until 2030, we'll have a total of something close to 2,690 customers, with 2,410 in the commercial segment.

Maintaining the revenue/customer assumptions from the previous analysis, which were already quite optimistic, we find a revenue of $21.4B for 2030.

The second assumption that increased net income the most was net income margin. As the company proved to be more efficient, I expanded it by 5 percentage points. With this net margin of 45%, we have a net income of $9.65B in 2030. The main problem with this is that we have to consider that the SBC will continue to remain stable over this period, as if it were a 'normal SG&A', growing at a rate closer to inflation, or at least growing at a rate far from the growth in cash flow.

With this net income, we find that the company is trading at 26.5x 2030 earnings. It seems extremely unattractive to wait 5 years for the company to still be trading at 26x forward earnings, and that's in an optimistic scenario that already considers very strong operational assumptions and an extraordinary margin gain.

New Assumptions For Palantir - Forecast Table

Palantir, Author (Kênio Fontes)

On the other hand, if this really is a megatrend, and in 2030 the market still sees potential for Palantir to be a growth stock, a premium valuation should be maintained. Perhaps something close to 40x earnings would be appropriate.

At this "fair multiple" of 40x, it implies that Palantir will have a market cap of $386B in 2030. This would result in an upside of 51% in 5 years, something close to returns of 8.5% per year.

It's worth mentioning that the market has also revised Palantir's forecast very positively, but they still point to an EPS of $2.45 in 2030, equivalent to a P/E of 45x.

Palantir - Consensus EPS

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Why I'd Still Hold PLTR Stock

This exercise is difficult, as it depends on several factors. Certainly, if Palantir were a stock with a lot of representation in my portfolio, I would reduce it due to the low margin of safety and downside risk, but I would still keep a small percentage in hold for the potential that the stock has.

8.5% a year, already considering very optimistic assumptions that incorporate AI growth, isn't attractive enough for a hold rating, nor for a buy rating, as there's too much downside risk if the company doesn't deliver what's expected.

What makes a hold rating the most suitable is that even if the outlook is already positive, the company can still exceed expectations, giving it even more upside.

In the US alone, there are thousands of companies with more than $1B in revenue, and Palantir's services are needed by companies all over the world. If, instead of 2.4k customers, we consider 5k and maintain the same assumptions, we have a 160% upside in 5 years.

This scenario doesn't seem the most likely, mainly because in order to reach so many customers, the company would probably have to reduce rev/customer, but still, it could happen.

Another possible scenario is for the company to maintain the same customer growth, but obtain a higher revenue/customer than I projected, such as $8 million instead of $6. This would raise the upside to 84%. By offering better and better services and with the customer increasingly engaged and always looking for more efficiency, Palantir has the power to keep increasing this indicator.

Holding a small position in Palantir means being exposed to the downside risk which exists and is quite considerable (in addition to the opportunity cost), but also to the upside risk if it maintains its lead and captures a significant part of the AI market.

I therefore maintain my hold rating for Palantir stock.