Palantir Smashes Q1 Earnings
Palantir’s Q1 2023 Earnings Were Good.
It’s been a week since I’ve got to sit with Palantir’s Q1 earnings and really dive deep into the numbers. In this edition of Daily Palantir, I’ll be highlighting the metrics I thought were awesome, good, and not the best. My overall thoughts — we couldn’t have really asked for a better quarter in one of the most uncertain economic times we’ve had since 2008. Palantir delivered a second consecutive quarter of GAAP profitability, continued momentous US commercial growth, decreased stock-based compensation, and the introduction of how high demand is for their latest AIP platform. The market rewarded it, sending it up 30% and having it settle at above $9 for a full week - something we haven’t experienced since mid-2022. You can watch my YouTube video here if you’d like to see my breakdown. Let’s dive in:
Palantir is GAAP Profitable and has officially made money from operations.
The biggest news from Q1 earnings was that Palantir achieved GAAP profitability for the second quarter in a row. The stock shot up 30% on this news and a week later is still hovering in the mid $9s. I honestly did not expect it to hold at this level given previous earnings pumps and dumps, but I’ve been pleasantly surprised (and upset, because if it gets back to 7 again…backing up the truck.)
Wall Street is emphasizing profitability over growth. In 2020, you could show profitability 20 years in the future and get a massive valuation since interest rates were zero. As the Federal Reserve has decided to raise rates to above 5%, companies have to show they can get profitable to gain investor interest in a very uncertain macroeconomic environment. Palantir guided to be GAAP profitable in every quarter of 2023, which means we will likely see them get into the S&P 500 index fund by 2024, creating more buying pressure on the stock from thousands of institutions around the world. What was even more surprising was Palantir brought in $4M of income from operations - meaning the actual business brought in profit, not just any external factors (like the $17M they generated from short term treasuries) in order to generate net income. Palantir is officially profitable.
US Commercial Remains Strong, International Is Struggling
Alex Karp has consistently said over the past few months that the US commercial business is “growing like a weed.” He has not been lying. US commercial continues to grow very well and is what led to Palantir beating on their earnings estimate of 506M by 19M to bring in 525M. It seems like American businesses, even in this uncertain time, are seeing the value of Palantir’s software in plain English and are deciding to buy the software to help their businesses. Even BP came out on their recent earnings and said that the cost for them to find barrels of oil has gone down from $14 to $6 simply because of the digital transformation Palantir provided. International growth is not going well, growing at 10% annually. Karp was asked about this in the call and simply said that if international continues to not grow the way they’d like, then they’ll just scale back employees and double down on what is working. I can’t be too upset about this - it is hard for international companies to immediately adapt to changing times, especially with economic uncertainty, so if the US business is what’s going to continue to make them GAAP profitable, then Palantir should double down and hope for when times get better to tackle larger international clients.
Customer Count Is Growing Very Nicely
Palantir has continued to add customers at a strong rate. They closed 64 deals of at least 1M, 22 were $5M and 8 were $10M. Total customer count growing 41% YOY is pretty amazing, but what was even more impressive to me was the total contract value. For Palantir to increase the TCV by 60% over one year is just astonishing. TCV is a measure of the total amount of revenue that a company expects to generate from a single contract - with a growing TCV, Palantir is getting more out of their customers on a revenue basis, likely because those customers are using the product more, renewing contracts, or being upsold on additional services Palantir can offer. In SaaS companies, a high TCV is incredibly attractive since it shows the company is showing growth within its customer base and revenue.
The Balance Sheet Is One Of The Best in The Markets
Palantir has no debt and now $2.9B in cash, up from $2.6B last quarter. The company has been using this cash to invest in treasuries and be incredibly responsible, fiscally, for shareholders. Although some have called for Palantir to do acquisitions or share buybacks, I’m happy they haven’t done any. If anything dramatic happens to the global economy, I don’t’ know that many other stocks that have a balance sheet prepared to tackle it. Palantir also sold their $50M in gold, pocketing a profit of 200k, likely moving that gold money into treasuries. The sale of the gold may signal they believe the worst is over in terms of uncertainty, but keeping the cash in the bank will allow them to have all the peace of mind they need if share buybacks or a strategic acquisition needs to occur.
Guidance & Stock Based Compensation
SBC reduced from 149M last year Q1 to 114M. It’s on pace to reduce another 30% YOY, which would really be good for shareholders. Now, this may be hard as Palantir ramps up sales in Q3-Q4, but if we can get close to the 25-27% reduction we got last year, we’ll be in a healthy position. Having close to 560M in SBC and still figuring out how to get GAAP profitable has been pretty spectacular, and I expect management understands what they need to do to make sure SBC does not become a larger issue after this year. Having said this, if we were able to become GAAP profitable with a hefty SBC bill weighing us down, I think we can expect better than 18% YOY revenue growth. Management did not change guidance form what they told us last quarter, but Alex Karp spent a lot of time during the earnings call explaining the demand for their latest AIP platform. He said, and I quote, “The demand is greater than any product I’ve seen in the past 2 decades.” If this is true, then I do believe Palantir is sandbagging their numbers for yearly rev growth - with more demand and closing of deals (Palantir has mentioned they have already been in hundreds of conversations with buyers for the platform), along with an upcoming NHS contract - to not expect 20% rev growth at minimum would be weird. If we come in below that, then it speaks to the broader issues Palantir is having with sales, but I do believe they want to keep expectations low for the rest of the year and hopefully blow past them within the next few quarters.
Overall, I was pleased with these earnings and the buzz of AI is only making Palantir’s prospects of truly changing the world more interesting for me. More customers, more demand for real AI platforms, increased fiscal responsibility with getting to GAAP profitability, and a 2024 horizon on S&P inclusion makes this a solid quarter.
That’s it for this deep dive - let’s see how the stock holds, but in terms of the company’s trajectory, I couldn’t be more excited.