Is Palantir Stock A Buy On Post-Earnings Selloff?

The 15% post-earnings selloff in shares of Palantir Technologies (PLTR) follows a spectacular triple-digit-percentage rally in the past year. Palantir reported upbeat first-quarter results after the bell on May 6 and raised the full year outlook for most metrics. Yet PLTR shares corrected significantly.

Up to the first-quarter earnings release on May 6, the stock had run up more than 200% on the year amid the raging excitement around artificial intelligence (AI) stocks and Palantir’s sustained profitability. The outsized rally for PLTR in the past year had given rise to overvaluation concerns with analysts rating PLTR between a Hold and Moderate Sell, tempering investor optimism for Palantir’s AI tools.

Does the recent selloff quell valuation concerns and present an opportunity to buy the PLTR stock?

PLTR Stock History

A closer look at PLTR stock’s tumultuous history may somewhat explain the apprehensions of the analyst community. From about a $10 IPO price in September 2020, to a whopping 4x rally in less than four months to $39 (on January 27, 2021), and then sliding to an all-time low of $6 on December 27, 2022 in the next two years, PLTR has been on a rollercoaster. After reaching its nadir at the end of 2022, PLTR has made a nice recovery, but is still 43% below its peak price in 2021.

Palantir Overview

Palantir’s sales in the past were solely derived from supporting the U.S. government and its allies in their counterterrorism initiatives. A major chunk of Palantir’s revenues are still derived from its government business, which represented 55% of its total 2023 revenues of $2.2 billion and 53% of first-quarter 2024 revenues of $634 million. However, Palantir’s commercial business is quickly catching up, with the U.S. segment fueling growth. Palantir is now focusing on its fast-growing commercial business to manage, interpret and report data for enterprises. Its latest offering AI Platform (AIP) aims to leverage generative AI applications to help businesses derive key insights. The demand for AIP is unprecedented, according to Palantir’s CEO Alex Karp.

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Palantir First-Quarter Earnings Summary: Upbeat Earnings, Outlook

• Palantir posted its sixth consecutive quarter of profitability and expects to be profitable on a GAAP basis (operating income and net income) in each quarter of the current year (fiscal 2024).
• The company has raised fiscal year 2024 guidance for almost every metric, and reaffirmed adjusted free cash flow (FCF) targets between $800 million to $1 billion.
• The U.S. commercial segment, a closely watched indicator of growth for Palantir, showed strong momentum thanks to the traction of Palantir’s AIP, and surpassed international commercial revenue for the first time. Continued headwinds in Europe led to a 3% sequential decline in international revenues to $149 million.
• AIP is driving the acceleration in customer count in the U.S. commercial business, which rose in the first-quarter to 262 customers, up 69% year over year and up 19% quarter over quarter vs. the 8% quarter over quarter growth recorded in first quarter 2023. This is despite the first quarter being the seasonally slowest quarter for Palantir.
• AIP is not only driving new customer acquisition, but also leading to expanding engagement from existing customers, including Lowe’s
  LOW
  , Cleveland Clinic and General Mills
  GIS
  , a Fortune 500 industrial company, and a Fortune 100 retail company. **
• Boot camps appear to be paying off for Palantir, leading to $286 million in U.S. commercial contracts (representing 131% growth year over year), and substantial compression in deal cycles. In the quarterly earnings call, Palantir cited the example of a leading utility company signing a seven-figure deal in just five days after completing a boot camp and a paid engagement signup by a customer just a day after a multi-day boot camp and conversion to a seven-figure deal three weeks later.
• The reacceleration in the U.S. government business with revenue rising 8% quarter over quarter vs. the 3% quarter over quarter increase in fourth-quarter 2023. Palantir launched builder boot camps within the U.S. government business, encouraged by the success of boot camps for its U.S. commercial business.
• Overall revenue and profitability outperformance raised Palantir’s Rule of 40 Score from 54 in fourth-quarter 2023 to 57 in first-quarter 2024, marking the third consecutive quarter of an expanding Rule of 40 Score. The Rule of 40 states that a software company’s combined revenue growth rate and profit margin should equal or exceed 40%. Companies at or above the Rule of 40 are typically awarded higher valuation multiples by the market.

What triggered the post-earnings selloff in the PLTR stock?

1. Sometimes, good is not good enough for investors. Palantir’s stock got punished because the market typically sets a high bar for a hyper growth stock like PLTR.
2. Overvaluation concerns for the PLTR stock and the perception that growth is not robust enough to warrant the high stock price. However, it should be noted that first-quarter 2024 marked the third consecutive quarter of an expanding Rule of 40 Score for Palantir. Companies at or above the Rule of 40 are typically awarded higher valuation multiples by the market.
3. Typically, quarterly earnings and revenue beats have been critical to PLTR stock’s near-term performance. PLTR shares have shown a pattern of post-earnings rally in three out of the last five quarters when it beat both EPS and revenue estimates and the rally sustained in subsequent sessions. But when Palantir missed revenue estimates while reporting second-quarter 2023 earnings on August 7, PLTR’s stock declined 21% through the end of August and recovered fully when third-quarter 2023 results were released in November. For the first quarter of 2024, Palantir surpassed revenue expectations, but EPS was just inline. Maybe, that did not sit well with investors.

Shares of PLTR not only opened higher following every earnings and revenue beat, but continued to add gains in the subsequent trading sessions as well.

For reference, the company released

• First-quarter 2023 earnings on May 8, 2023, after the bell. PLTR shares opened on May 9, 2023 at $9.22, which was 19% higher than the May 8 closing price of $7.74. The PLTR stock kept adding to gains in the subsequent sessions and closed at $19.99 on August 1, 2023–just a few days before the release of its second-quarter results on August 7.
• Third-quarter 2023 earnings on November 2. PLTR opened post-earnings trade at $17.48 vs. a previous close of $14.92, higher by 17%. This time too, shares rallied for the next few sessions, closing at a high of $21.34 on November 20.
• Fourth-quarter 2023 earnings on February 5, 2024. PLTR opened on February 6 at $20.30 vs. a previous close of $16.72, higher by 21% and ran up to close at a new high of $26.46 on March 7.

On the other hand, consequences can be brutal if a hyper growth stock like PLTR misses estimates even slightly. This was evident when Palantir missed revenue estimates while reporting second-quarter 2023 earnings on August 7. The stock declined 21% through the end of August before recovering.

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PLTR Stock Key Metrics To Watch

Palantir’s Profitability trends gathering momentum

The year 2023 marked the first profitable year in Palantir’s history. In the first quarter of 2024, Palantir achieved GAAP profitability for the sixth consecutive quarter, and GAAP operating profitability for the fifth quarter in a row. GAAP net income rose 6x to $105.5 million in the first quarter on a year over year basis, while GAAP operating income expanded by nearly 20x to $80.88 million from $4.12 million in the first-quarter of 2023. Adjusted operating income rose to $226.5 million in the first-quarter of 2023 above Palantir’s own guidance for $196 to $200 million. Including the latest quarter results, Palantir has outperformed its guidance numbers in the past five quarters. CEO Karp has reiterated guidance for 2024 adjusted FCF of $800 million to $1 billion affirming Palantir’s sustained and growing profitability.

Achieving GAAP profitability for the sixth consecutive quarter qualifies PLTR with the eligibility for inclusion in the S&P 500 index, which requires the sum of a company’s trailing-12-month earnings to be positive. The S&P 500 rebalances every quarter and the next rebalancing is slated to occur in June. If PLTR is included in the S&P 500 index, it may garner more attention from institutional investors.

Continued acceleration of Palantir’s U.S. commercial business to drive growth

Palantir’s U.S. commercial revenue grew to $150 million in the first-quarter of 2024, up 40% year over year and 14% quarter over quarter, thanks to the 69% year over year growth (or 19% quarter over quarter growth) in U.S. commercial customer count to 262. The U.S. commercial revenue represented around 24% of Palantir’s total revenues in the first quarter and will remain a key growth driver in the near-term. Thanks to boot camps, Palantir closed 136 deals in the first quarter, up 94% from 70 deals in the year-ago period in the U.S. commercial segment. Palantir raised its U.S. commercial revenue guidance for 2024 to more than $661 million from prior expectations of $640 million and 45% above 2023 levels of $457 million (which represented 36% year over year growth from 2022 levels). The raised guidance shows acceleration in the year over year growth of Palantir’s U.S. commercial business from 36% in 2023 to 45% in 2024. New partnerships with the likes of tech giants like Oracle, alongside expansion into healthcare, energy and manufacturing sectors appear positive for the U.S. commercial business.

Palantir’s Future Growth Driver: AI Platform (AIP)

Unprecedented interest in Palantir’s AI Platform is propelling growth via new customer acquisitions and expansions with existing customers. Bootcamps or the go-to-market motion for AIP are already supporting substantial compression in deal cycles. AIP is also accelerating growth in U.S. commercial customer count to 19% quarter over quarter in first-quarter 2024, compared to 8% quarter over quarter growth in first-quarter 2023. Palantir booked $286 million of U.S. commercial total contract value (TCV), representing 131% growth year over year. Total remaining deal value in Palantir’s U.S. commercial business grew 74% year over year and 14% sequentially. AIP is also driving expansion of engagement from existing customers including Lowe’s, Cleveland Clinic and General Mills. A Fortune 500 industrial company signed a three-year expansion deal, boosting the annual revenue run rate to Palantir by nearly five-fold from an initial engagement in 2022. A Fortune 100 retail company that started a pilot in second-quarter 2023, expanded its work to a $12 million ACV enterprise engagement last quarter.

Reacceleration Of Palantir’s U.S. Government Business

Palantir had formerly cited the continuing resolution and timing of large potential contract awards muting the impact of the strong U.S. government business in the fourth quarter, and at the time stated expectations for the business to reaccelerate in 2024. U.S. government revenue grew 12% year over year and 8% quarter over quarter to $257 million vs. 3% quarter over quarter growth in the fourth quarter. U.S. government revenue represented approximately 77% of total government business in the first quarter and 37% of total revenues for the quarter. Palantir cited continued demand for its Mission Manager and positive reception to First Breakfast, its nascent defense tech ecosystem. Early march, Palantir bagged a new $178 million U.S. Army contract for project Titan, an AI-powered battlefield system.

Palantir’s CEO Alex Karp commented on the mission critical nature of Palantir’s government business in the first quarter earnings conference call…

“Our mission footprint, whether it’s in Ukraine, Israel or in the United States government is stunning. There is basically no conflict in the world that is not — that where Western allies are involved and the battlefields involved and the stakes are life and death, where Palantir is not the first call.”

PLTR Stock Investment Considerations

Palantir’s Strengths

• Palantir is guided by secular AI tailwinds amid the ever-rising need for organizations to integrate their data, decisions and operations at scale.
• The mission-critical nature of Palantir’s solutions in government businesses across the globe.
• In the event of a global recession or slowdown, government clients can cushion Palantir’s top line.
• Bootcamps to drive sustained revenue growth by accelerating new client acquisition, expanding existing customer relationships and substantially compressing deal cycles.

Risks And Challenges

• Macroeconomic headwinds in Europe, which represents about 16% of Palantir’s business. Europe barely expanded through 2023 and prospects for GDP growth in 2024 appear muted.
• Palantir’s decision not to engage in business with China, the second largest global economy, is a move that could likely hurt its future business prospects.
• Palantir’s skewed governance structure, which gives founders Alex Karp and co-founder Peter Thiel super voting powers through a third class of stock.
• Possibility of future competition.

Palantir’s Long-Term Outlook

Secular AI tailwinds, mission-critical solutions, interesting product lineups, the growing U.S. commercial business and demand for AIP should be the long-term growth drivers for PLTR. Government business will cushion Palantir’s topline during slowdowns. Sustained and growing profitability could lead to a possible inclusion in the S&P 500 index, giving PLTR the visibility it deserves, while positioning it on the radar of institutional investors. Along the road, competition could be robust. Palantir’s skewed governance structure and decision not to engage in business with China could hurt Palantir’s long-term prospects. Slowing economic growth outlook for Europe is also a major concern.

Bottom line

PLTR stock is a growth narrative powered by the AI boom and rising data challenges, as recent quarterly earnings reaffirm. Acceleration of the U.S. commercial business and AIP traction will be key to PLTR stock’s growth outlook. The mission-critical nature of Palantir’s solutions should reignite growth for the government business. Risks include future competition, disinclination to do business with some large economies like China and slowing growth in Europe.

Please note that I am not a registered investment advisor and readers should do their own due diligence before investing in this or any other stock. I am not responsible for the investment decisions made by individuals after reading this article. Readers are asked not to rely on the opinions and analysis expressed in the article and encouraged to do their own research before investing.

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