PicoBlog

Alright, it’s time we publish a newsletter.

First off — sorry I haven’t sent out one of these since Q4 Earnings. If you’ve kept up with my YouTube channel, I have literally been live everyday for almost 10 hours. One day, we did 9 hours straight. The reason? Palantir kept going up, so I kept streaming. Me and 1100 other people watched that stock go up tick by tick from $19 to $25…and it’s been a really fun ride. Here’s a recap of where I’ve been.

I am back to publishing daily and today will be my recap of Q4 earnings. Many of you probably already know my thoughts, but I wanted to get them down in writing. There has been a lot of news besides the earnings in the past week that I’ll discuss in newsletters every day this week — but for now, let’s discuss what happened during Q4.

Okay, so I thought these earnings were spectacular. Palantir shocked everyone with some key numbers, specifically their numbers and guidance in US commercial. In Q4, they grew 70% YoY and are guiding for 40% YoY growth. It goes to show that AIP is working, is starting to scale, and Palantir sees this as a major opportunity to actually capture the market.

During the earnings call, we got the same Karp, but his words felt different. Why? Because this time, he finally had the numbers to back up his bravado. We are used to Karp being cocky and arrogant, in fact, that’s likely the reason so many of us were excited to invest in his company in the first place. But being cocky only goes so far when the numbers and business growth don’t match the expectations set by your tone. Finally, in Q4, we had a Palantir that put up serious growth that can’t be denied.

Now, these numbers were not blow away numbers like NVDA in Q1 of 2023, but they were numbers that gave an indication for Palantir’s future growth — and that’s what made this earnings so exciting.

3.7B in cash, no debt, guiding for $1B in free cash flow…there’s a lot to be excited about now that the business is catching up to what we all thought it had the potential to do.

As of writing this, Palantir is up 40% YTD. It’s hard to even write that and believe it, but as you can see above, it’s true.

Palantir more than tripled last year after becoming fully GAAP profitable and reaching a low of about $6. Many people, including myself, saw the company having another solid year — but we did not think it would happen this quickly.

This also gives me some concerns. I’ll highlight the bull and bear case around stock action here:

Bear Case: The stock has simply run up too quick. Palantir has added 25B of market capitalization for reporting 2.685B in revenue guidance for 2024. This is a company that did 200M in profits last year, half of that being from interest income on their cash, so one can argue that the valuation is starting to get up there. This 40% run also happened within 5 days, and usually runs like that are not sustainable without some type of meaningful pullback.

Bull Case: Although Palantir has run aggressively, it is warranted for a variety of reasons. First, NVDA has added $500B of market cap within 5 weeks. Although Palantir isn’t growing like Nvidia, it is in the same sector — AI — and if demand for AI is surging, it means growth will continually get better across the board, and fund managers will need exposure to AI. In other words, the hype is real.

Comparable software companies like Snowflake and Datadog, although growing faster, have marketcaps similar to Palantir, or in the case of Snowflake, 20B above Palantir’s maketcap. This then begs the question — if the market is willing to give a premium to other software players that likely are not as important or transformational in the AI space as Palantir, then why doesn’t Palantir also deserve a similar valuation?

Finally, Palantir did put up the numbers. 70% US Commercial growth is nothing to overlook — and they may be sandbagging how quick they will be able to accelerate international commercial growth as they scale their bootcamps across the world. The company grew customer count 35% YoY and locked in 103 deals in Q4 alone. The street upgraded Palantir across the board as shown below, indicating that Wall Street also feels the hype is becoming supported by real valuations.

Jeffries —> Hold PT $22

Citi —> Neutral PT $20

DA Davidson —> Upgrade PT $19

Deutsche Bank —> Upgrade PT $18

Wolfe Research —> Upgrade PT $14

BofA Securities —> Upgrade PT $24

Morgan Stanley —> Upgrade PT $12

Mizuho Securities —> Upgrade PT $18

Wedbush —> Upgrade PT $30

HSBC —> Upgrade PT $22

Raymond James —> Upgrade PT $25

While one can argue that the run up has happened quickly and a pullback is likely just because of market dynamics, I don’t think anyone can argue that Palantir does not deserve a $22-$25 price given every firm on wall street (except our boy Rishi from RBC who reiterated his $5 PT after earnings, lol) also believes this company is ready for primetime when it comes to capturing the AI market.

Some core metrics I wanted to cover from earnings:

This was the star of the show. Commercial revenue is growing at 30%+ YoY and US Commercial is growing at 70%. The United States is going to be where Palantir innovates and sells the most software — companies want AI, are willing to pay, and are excited for partnering with a name like Palantir. Alex Karp at the latest earnings call said that trying to get into AIP con is like trying to get tickets at a popular concert. People are excited and, in his words, “demand is off the charts.”

If Palantir can continue this momentum and eventually get international commercial clients to also begin scaling — we’ve seen a few international commercial deals in the past week — then we are just at the beginning of AI growth for Palantir.

We needed a strong customer count this quarter, and Palantir delivered. They added 44 new customers this quarter, increasing the growth rate from 8% over the past 2 quarters to 10%. This to me, again, is just the beginning. There is now reason Palantir can’t have close to 1000 customers by the end of this year if they can scale bootcamps.

More bootcamps, more customers, more growth.

This was the part of the business that ended up slowing the most — government revenue. Karp did give clarity on the call about what will end up happening with the government business, and his core point was that Palantir’s software is in demand and that countries will eventually have to buy their product. He used much fancier language, but that was the jist of it.

So far, Palantir has not been able to get Gotham deployed across all NATO countries across the world. Some of them like Palantir, some of them don’t, some of them probably don’t feel the need yet to pay for a software like this. Karp believes they eventually will.

The commercial business is what every investor should focus on because that is going to be the deciding factor in how much growth Palantir can put up while the government business stalls. In my opinion, they are going to need a year before massive reacceleration, and that means commercial will have to grow faster in order to subsidize the time for waiting on government.

Now, the US gov is going to spend more on AI. Palantir is convinced of this, and quite frankly, given the geopolitical conflicts we are seeing — the US will have to spend more on defense, particularly in software, in order to remain competitive. This is when we will have billions added to the TAM of how much Palantir can win just in the US alone, and even if they takes some time, the commercial business is growing fast enough to offset this.

Here’s a chart by Shyam Sankar showing the marketcaps of defense companies and the number of employees — eventually Palantir will benefit from more spending because the US will HAVE to spend to make sure they don’t fall behind the technological revolution happening in defense tech.

This was one of my favorite metrics to see inch higher. Palantir has a 17$ adjusted operating margin 18 months ago. That has now doubled, and is up 5% QoQ.

This is an important metric because it lets us know how much money Palantir is making from their business itself — a software business should have high 30s to low 40s on adjusted operating margins because the benefit to software is it’s infinite scale — there’s not a lot of costs! Once you build it, you should be able to scale it globally, and after expenses, you should still have a healthy margin left which is why tech investors pay a premium for SaaS businesses.

I believe Palantir will aim for 35-40% adjusted operating margins over the next decade. If we can grow this margin even if we don’t grow topline growth as quickly, then that will still improve the fundamentals of the business because we’ll simply be making more net income. In fact, the net income last quarter grew 29% QoQ (93M vs 71M) vs the top line revenue growth coming in at 20%. This means the business itself is starting to have operating leverage and the more that increases, the better it will be for Palantir’s free cash flow and GAAP profitability.

We closed 103 deals. That’s a lot of deals.

We added 44 net new customers, so that means we added 59 deals with existing clients — likely upselling them on AIP.

Now, what does this mean? Well, it means that AIP is actually in high demand. In order for AIP to offer any value to a business, you need to have Foundry, or some type of ontology for your data already set. Most clients that have purchased Palantir’s software in the past have bought some type of version of Foundry. AIP is a layer on top of Foundry that now grounds LLMs (Large Language Models) in the context of the business reality of your organization.

If Palantir is able to get existing clients to buy AIP, it means that those clients are seeing the value they can get by implementing an enterprise AI platform on top of their existing ontology — the hype is real!

This leads me to believe that Palantir can continue to penetrate their existing customer base, even if they just get them on pilots, because if those customers see the value, they will convert and that can also increase Palantir’s net dollar retention — which was 108% last Q, up from 107%, but needs more progress to see 124% from a few quarters ago. More existing clients using AIP will likely lead to NDR increasing over the next quarters.

Overall, it was a pretty incredible earnings. There is a lot to cover, this story is just getting started, and I’m happy you all are along with me on this journey.

That’s it for today — I’ll be back to daily newsletters. See you in your inbox tomorrow!

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