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Palantir Technologies (New York Stock Exchange: PLTR) share price has fallen significantly over the past 12 months, rising almost 192%. Still, Palantir stock deserves more love as its AI business continues to gain momentum amid favorable macroeconomic trends. The company’s aggressive expansion into commercial capabilities could accelerate revenue growth and pave the way for solid profit growth. I’m bullish on Palantir because there’s compelling evidence to suggest the company is still in its infancy.
Commercial expansion is gaining momentum
In the fourth quarter of 2023, Commercial revenue increased 32% year-over-year to $284 million, while Government revenue increased 11% year-over-year to $324 million. While the government sector still accounts for the majority of revenues, the commercial sector continues to grow at a high rate, indicating strong momentum behind this business sector. This impressive growth is driven by the success of AI integration platforms.
Artificial Intelligence Platform (AIP) “bootcamps” have proven effective in expanding the market opportunities for companies to address. Since the company set a goal in October to conduct 500 AIP bootcamps in one year, it has already conducted 560 bootcamps with 465 organizations participating.
According to company executives, these bootcamps are already helping Palantir shorten sales cycles and accelerate customer acquisition. The company reported that in the fourth quarter of 2023, new U.S. commercial contracts over $1 million doubled compared to the fourth quarter of 2022.
To drive commercial revenue growth internationally, the company has relied on forming strategic partnerships. For example, Palantir partnered with Fujitsu to expand its presence in Japan, allowing it to bring AIP and data integration capabilities to new geographic locations. As another example, Japan’s leading health insurance company has partnered with Sompo Care to provide real-time data to nursing homes and elderly care facilities.
Palantir is also focused on developing industry-specific solutions to drive growth in this area. For example, in the automotive sector, Palantir focuses on helping electrical system manufacturers optimize production. In the manufacturing space, we are developing AI-powered disruption management applications to help companies save millions of dollars in losses caused by potential business interruptions.
In addition to these sectors, Palantir has expanded and established presence in the healthcare, retail and financial services sectors through strategic partnerships.
investment is paying off
Over the years, Palantir has invested heavily in developing a robust platform and customer acquisition. The company is now reaping the fruits of these investments. The fourth quarter of 2023 marked Palantir’s fifth consecutive quarter of profitability. The company has come a long way from a net loss of $124 million in Q2 2022 to a net profit of $93.4 million in Q4 2023. Palantir’s increasing profitability is evidence of the company’s scalable business model.
A closer look at AIP’s recent success shows that this has been possible thanks to the significant investments the company has made in the development of its core platforms, Foundry and Gotham. AIP essentially brings the power of these two platforms into a more accessible and commercially viable form.
The company’s close relationships with governments, made possible through significant investment in its core products, have recently helped it attract large corporate customers. Palantir’s expertise in operating software across government agencies helps the company address commercial software implementations in challenging environments, which provides a strong competitive advantage in the long run. There is a possibility that
Palantir has historically spent a lot of money integrating large-scale language models and other AI components into its product suite, which is proving to be a differentiator today. Masu.
Improving Palantir’s profit margins
Palantir’s adjusted operating margin reached 34% in the fourth quarter, a significant improvement from just 22.5% in the year-ago quarter. Free cash flow margin also increased to 50%, demonstrating strong operational efficiency and the company’s ability to convert earnings into cash.
Digging deeper into Palantir’s recent financial performance reveals several reasons behind its continuously improving margins. The growth of the commercial sector, which has higher margin contracts compared to the government sector, is one of the main reasons for the margin expansion. Additionally, our focus on economies of scale and responsible growth also plays a major role in driving margin growth.
Overall, Palantir appears well-positioned for further profit growth on the back of a growing revenue contribution from its commercial division. This could allow the company to report record free cash flow in 2024, potentially boosting the stock price.
Is Palantir a buy, according to Wall Street analysts?
In early February, PLTR stock soared more than 20% following the announcement of strong Q4 2023 results, resulting in a notable expansion in valuation multiples. This forced HSBC analyst Stephen Barsey to downgrade Palantir while maintaining his $22 price target. In a note to clients, the analyst acknowledged the positive development of the U.S. commercial business and the better-than-expected success of API Bootcamp.
Jefferies analyst Brent Till also sounded bearish in January, arguing that AI is currently overhyped. In summary, he believes Palantir’s valuation has already risen to an unsustainable level.
Wall Street’s consensus forecasts reflect this pessimism. Based on ratings from 13 Wall Street analysts, Palantir’s average price target is $18.55, representing a 19.5% downside risk from today’s market price. Overall, the stock has a consensus rating of “Hold”.
Nevertheless, despite the widening valuation multiple, there’s no hiding the fact that Palantir is enjoying a long road to growth. Continued growth in revenue, net income, and free cash flow should support stock price appreciation over the long term.
Bottom line: Palantir isn’t cheap, but it’s still attractive
Amid rapid growth in the commercial sector, Palantir is well positioned to reach new financial highs in 2024. The company could emerge as a big winner as AI adoption increases across various business sectors. Analysts think this valuation is high, but if earnings growth accelerates, Palantir stock will likely trade even higher over the long term.
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