Palantir Earnings: Let's Talk About It
It took me a week to digest all the numbers that came out from Palantir's Q2 earnings. I have a bunch of thoughts I will outline below. Overall, I am still very bullish on the company, have not sold any of my shares, but will wait to see before I continue to buy the dip.
First, let's get into the core issues people had with the earnings call.
Karp's Behavior
I will admit, Alex Karp probably could have been a bit more professional. He was cutting off questions, banging on the table, and seemed more defensive then a CEO should be when talking about their growth trajectories given their numbers this quarter were not amazing.
However, he's also a huge part of the reason I invested. I have my own startup, I know what it feels like, at some level, to have people invest in you because they feel like you are the one person that can actually bring a vision to life.
If you invested in Palantir, you were investing in all the idiosyncrasies that came with the CEO. People who were angry that he was banging on the table had a right to feel annoyed, but at the end of the day, Alex Karp is not going to change.
The man is who he is. His frustration seemed to come from analysts asking about 30% CAGR - Karp's main point against this was that even if the 30% CAGR does not happen every year perfectly, he plans to drive the company to 4.5B in revenue, which would average to 30% CAGR from now. Did he have to bang the table to prove this point? Probably not.
But he wouldn't be Alex Karp if he didn't. At the end of the day, a bet on Palantir is a bet on Karp.
The Numbers
Okay, the numbers weren't great - but I don't think they were horrible either. Palantir beat expectations on revenue by $1M, bringing in 473M over 472M. They missed on EPS primarily due to SPAC losses.
The number highlights:
While growth was not explosive, I can't necessarily be upset around the US growth from the commercial side in particular. Total US revenue growth crossed 1B, up 42% from last year, and the trailing 12 months revenue also crossed $1B, up 41% from a year ago.
Now, the government side was the one that most people were annoyed about. I probably will write another article explaining why governmental revenue growth is only increasing 13% YOY (while commerical is doing much better), but the main reason that Karp highlighted was the politics of landing these deals.
He explained on the earnings call (can listen here) that over the past decade, the government side of the business grew on average 35% YOY. However, there were many years where the government growth was flat or negative due to the politics of landing deals, getting paid on time, and securing contracts.
His main frustration on the call was communicating that he knew Palantir had the best product for the government, but that he couldn't show growth due to the fact that those deals simply haven't closed, budgets haven't been passed, or a myriad of external reasons stopping Palantir from growing quicker.
What's Palantir Doing With 2.4B on The Balance sheet?
In the picture above, you can see the commercial customer count growing nicely. The problem is that it is not growing exponentially.
The biggest concern I saw many shareholders have with the company is that Palantir has over 2B on it's balance sheet and isn't really using any of that money to grow quicker.
Now, I think there's nuance here. First, Palantir has no debt - which makes their business incredibly resilient during these uncertain macroeconomic times. One can argue that we have still not had the "crash," and if it does happen, then companies with less debt will thrive over companies with massive amounts of debt and no way to pay it off.
Second, Palantir may just know something about the state of the world that is different or going to be different if a geopolitical event were to happen and cause more issues - for example, China invading Taiwan. I personally do not see this happening at the level of Russia/Ukraine, but Palantir may have their doubts on the state of the world 5 years from now which also explains why they bought $50M worth of gold in August 2021.
Alex Karp mentioned there were 41 trained sales people on staff. The core argument I heard from shareholders was that the 2B+ on the balance sheet needs to be used to hire more sales people, train them quicker, and then get more deals done to grow.
Personally, I agree with this to an extent. The hardest part of the earnings call was hearing that Karp does not expect Palantir to be profitable until 2025.
That means there will be 10 more quarters of Palantir not being GAAP profitable. If growth is not astronomical during this time, Wall Street is simply not going to give Palantir any benefit of the doubt or long term potential because of their inability to make profits. Without stock based compensation, that is going down 30% YOY, they would be profitable already, so unless they massively decrease this, only growth will lead to profits. It doesn't seem like a horrible idea to build out a stronger sales force.
My core conclusion is as follows:
I am not selling, but not buying the dip just yet
I want to see how the salesforce gets better over the next few quarters
I want to see if Palantir lands the NHS and TITAN contracts
There is zero doubt in my mind about the technology - I've researched and spoken to enough people about it. The question now is sales and their go to market strategy. The good thing about the latter is that both can be fixed.
They need to revamp culture, train quicker, spend more money getting better sales people, and then scale. It's easier said then done which is why I am being patient and giving them time, but if they figure out sales, I still believe Palantir is a rocketship - it's just a question of when they will decide to take off.
You can see my overall thoughts here:
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