Palantir Stock: Potential 3X Growth By 2025 (NYSE:PLTR)

Introduction and Thesis

In my previous Palantir (NYSE:PLTR) article, I had a neutral rating on the stock. The title of the article was “Let’s wait a little more before buying Palantir” saying that due to stock-based compensation, SBC, it may be better for investors to wait before buying Palantir. After about a month and a half of waiting, I am upgrading my rating of Palantir from neutral to a buy.

Palantir continues to prove its potential through the power and the demand of its software which is shown in the previous earnings report. The company not only grew at an astonishing speed, but Palantir also gave strong growth guidance. Further, the SBC problems have been mostly resolved to show that the company’s SBC is moving in the right direction. Finally, Palantir has strong financial health, which may be critical if there are major geopolitical threats like a war. Therefore, I believe investing in Palantir can 3X investors’ return at these levels by 2025.

Progress

Earnings Report (Financials)

Palantir reported revenue growth of 41% to $1.5 billion while maintaining its net-dollar retention rate at 131% and growing its total customers by 71%. The nature of Palantir’s business makes it extremely important for the company to grow its customers. In fact, at this stage, I believe it is more important for the company to grow its customers than for the company to grow its revenue as Palantir is an extremely sticky business. Once a customer integrates its operations with Palantir’s software, it is not only hard to switch to another solutions company, but Palantir can continue to upsell its customers by expanding its use cases after an initial set-up and penetration of its systems. Thus, the fast growth of the customer count shows the future revenue growth potential for Pentair. Further, Palantir reported a gross margin of 83% with an adjusted operating margin of 29%. Overall, the company showed strong revenue growth while maintaining margins and future opportunities.

Most importantly, the company reiterated its long-term growth forecast. The company continued to expect 30%+ annual growth. The confidence the management team has in the business’s growth in the volatile market today shows reassurance for the value and the demand for Palantir’s products. The world is inevitably relying more and more on software and especially data analysis technology, and I believe that Palantir will likely benefit from this massive underlying trend, which is shown in the management team’s growth forecast.

3X Opportunity

SaaS companies, less mature companies, growth companies, and big data companies have something in common: they receive high valuations. The reason for this higher valuation is a result of future growth expectations in a massively growing industry with a scalable and predictable business model. For example, Salesforce (CRM), a cloud-based software company, is trading at about 46 times the forward price to earnings even after a dramatic 30% fall from its peak. Smaller companies growing at a similar or faster pace than Palantir are also receiving high valuations. CrowdStrike (CRWD) is a leader in cloud-based cybersecurity services, and the company receives a forward price-to-earnings ratio multiple of about 200. As such, given that these less mature, scalable, predictable, and growth companies receive high valuations, I believe it is possible for Palantir to be trading at about 50-60 times the forward earnings range as the company reaches and grows its profits in the near future.

Palantir’s management team has consistently reiterated their growth forecast of greater than 30% year-over-year growth through 2025. As such, I will use this guidance in creating my price target for Palantir. Assuming the company grows at about 30% year-over-year until the end of 2026, the company will report a 2026 revenue of about $5.72 billion. This is slightly conservative, in my opinion, as the management is forecasting a growth of greater than 30%. Then, if we assume about 25% margins, the company will report a net income of about $1.43. With about 50-60 times the forward price to earnings ratio, toward the end of 2024 or at the beginning of 2025, it is likely for Palantir to be trading at about $71 to $85.8 billion market capitalization creating a potential growth forecast of about 3 times in the midpoint from the current market capitalization.

Considering Palantir’s fast customer acquisition rate, underlying trend, and the management’s forecast, I believe investors may be able to see a three-fold return on investment in Palantir by 2025.

SBC

One concern that I pointed out in my last article was Palantir’s high SBC which had no clear signs of slowing down. Although the company continued to defend the reasons for its high SBC in the most recent earnings report, Palantir’s SBC in absolute numbers and relative percentage to the revenue has decreased. As the charts below show, the absolute number of SBC Expenses has decreased for three consecutive quarters while the SBC expense to revenue ratio has fallen below 50%. Although these numbers are still high, the clear trend in the right direction combined with high margins and revenue growth rate indicates that the SBC risks are diminishing.

	2021Q1	2021Q2	2021Q3	2021Q4
All SBC Expense	$231 million	$263 million	$208 million	$183 million
SBC/Revenue	67.74%	69.95%	53.06%	42.26%

[Table created by author using Source1 and Source2]

Financials

Palantir “is a company built for bad times.” CEO Alex Karp said this to show the strength of Palantir’s balance sheet. I believe this financial health is extremely important considering the current macroeconomic and geopolitical risks. The Russian invasion of Ukraine had massive ripple effects throughout the global economy disrupting the flow of key goods including energy, food, and raw materials. This has fueled the urge for de-globalization that has started since the pandemic. The war and the pandemic have exposed the risks of relying on foreign countries, especially in times of global conflict. Thus, a massive shift to reduce the reliance on foreign countries has started throughout the world creating uncertainties in the market. Therefore, Palantir’s strong financials provide a financial safety moat for the company.

The company has $2.3 billion in cash with about $3.25 billion in total assets. Palantir has a negligible debt with total liabilities of about $950 million bringing the total liability to asset ratio (L/A) of the company to about 29%. On top of the strong balance sheet, Palantir’s operations are becoming more profitable creating a stronger moat. From operation, the company generated about $93 million dollars in 2021Q4 compared to an $18 million net cash used in operating activities in 2020Q4. As growth persists and the company becomes more efficient, Palantir’s cash generation will become stronger as the company reaches profitability creating a stronger financial moat.

Risks

Cathie Wood has been one of the biggest bullish investors of Palantir; however, in recent weeks, her ARK fund has mostly sold out of Palantir. Although Cathie Wood has never explained the reasoning behind such actions, many investors pointed to a slowing government business revenue growth. In the 4th quarter, Palantir’s year-over-year revenue growth was 34% while the government revenue grew at a slower 26%. This figure has been seeing a consistent decline throughout the year suggesting that Palantir’s government business has reached its growth peak already. In 2021Q1, 2021Q2, and 2021Q3, the government business grew at a yearly rate of 76%, 66%, and 34% before falling to 26% in 2021Q4. Therefore, due to the slowdown in Palantir’s biggest revenue contributor, some investors are pointing out that the growth momentum in Palantir is unsustainable with just its commercial business.

Summary

Palantir’s software is in demand. It enjoys a massive underlying trend of digital technology adaption and utilization potentially providing the company with a fast growth rate. Further, Palantir’s SBC problems have mostly dissolved as the company’s SBC continues to decrease as the revenue and operational efficiency grows. For this reason, I believe Palantir stock has the potential to appreciate about three times by the end of 2025. Therefore, I rate Palantir as a buy.