When bullish investors dubbed Palantir (NYSE:PLTR) as the next Meta Platforms (NASDAQ:FB), the comparison told only half the story. PLTR stock has a very long path to revenue. The company will win small contracts, then customers will increase their investment as the business relationship grows.
Ever since the Nasdaq weakened in November 2021, PLTR stock plunged with the index. When might the downtrend end?
Team-up Failed to Lift PLTR Stock
To kick off the year, Palantir and Hyundai Heavy Industries announced a team-up. The firms are slated to build a big data-engineering platform that will handle HHI’s core businesses, including shipbuilding and offshore engineering. Palantir did not offer any financial details. As a joint venture, the partnership implies both firms will incur costs. Palantir will not report any revenue from the platform until it is up and running.
Ki-sun Chung, Chief Executive of HHI, said that the partnership “will substantially improve the competitiveness of core businesses of the Group.” It signals an inflection point with the way HHI staff will use data. PLTR investors will need to have patience. The deal widens Palantir’s addressable market. As HHI relies more on the platform, Palantir will have a chance to upsell new products and features.
Last month, Palantir announced a partnership with Dewpoint Therapeutics. Dewpoint is a biomolecular condensates company. It will use Palantir’s Foundry platform to help Dewpoint discover treatments and cures for diseases.
Strong Q3/2021 Results
In the third quarter, Palantir posted revenue growth of 36% year-over-year to $392 million. The company touted its 34 new net customer additions in the quarter, a 46% sequential (quarter-on-quarter) increase in commercial customer count, and 54 deals worth at least $1 million in the quarter.
Problems arise when shareholders review the adjusted free cash flow of $320 million and adjusted operating income of $349 million. As shown in the appendix, Palantir incurred $86.29 million in taxes related to stock-based compensation. It lost $352.1 million from operations but added back $611.3 million in stock-based compensation cumulatively from Q1-Q3/2021.
On its conference call, Chief Operating Officer Shyam Sankar said the company expects revenue will grow by 40% for the full year. Product innovation, efficiencies in distribution and a strong sales team will lift sales. Investors may expect sales momentum to continue this year as the 150 new sales staff improve in performance.
Fair Value
On Wall Street, analysts are disconcertingly bearish on Palantir. The average price target is $22.14 (per Tipranks). Yet half the analysts rate the stock as a “sell.” Simplywall.st’s number cruncher is even more bearish. The site calculated an $11.32 fair value.
Readers may ignore the above price targets and build a financial model instead. Come up with revenue growth scenarios in the next five years. In this discounted cash flow revenue exit model, assume a terminal multiple of 6.5 times. At a discount rate of 7.5%, PLTR shares are worth around $15.50.
| Metrics | Range | Conclusion |
| Discount Rate | 8.0% – 7.0% | 7.50% |
| Terminal Revenue Multiple | 6.1x – 6.8x | 6.5x |
| Fair Value | $14.60 – $16.27 | $15.42 |
The revenue growth forecast below underestimates Palantir’s future potential. The company expects Q4 revenue strength and 40% revenue growth for 2021, or $1.5 billion.
| (USD in millions) | Input Projections | |||||
| Fiscal Years Ending | 20-Dec | 21-Dec | 22-Dec | 23-Dec | 24-Dec | 25-Dec |
| Revenue | 1,093 | 1,527 | 2,061 | 2,783 | 3,757 | 4,910 |
| % Growth | 47.20% | 39.80% | 35.00% | 35.00% | 35.00% | 30.70% |
| EBITDA | -1,159 | 459 | 565 | 793 | 1,315 | 1,620 |
| % of Revenue | -106.10% | 30.10% | 27.40% | 28.50% | 35.00% | 33.00% |
In the model above, assume revenue growth slows to 35% this year and to 30% Y/Y by the fiscal year 2025. Palantir won many government, military and health organization contracts in the last year.
Its Foundry module will also appeal to large banks. Look for this software giant to announce wins with European retail banks. Those customers will need to integrate archaic enterprise resource planning solutions. They will need Palantir’s solutions to gain better insight into their customer data.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.
