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Denver-based Palantir, Inc (ticker: PLTR) released its Q2 earnings after markets closed on the 5th of August. While analysts had estimated earnings per share (EPS) at $0.08 on revenue of $653 million, the company’s actual EPS of $0.09 were earned on the back of revenues of $678 million. Immediately following the earnings, the stock surged1 during both extended trading on the 5th as well as early trading on the 6th. As of close on the 6th, the stock rose another 10%.
As it stands, trends as of the first half (H1) of the year have several milestones seemingly on the verge of being made.
Trend Analysis2023 was a transformative year for the company’s fortunes, with H1 2024 performance showing early trends of beating:
Source: Company Information; Leverage Shares analysis
2023 was the year when operating income as well as EPS went from negative to positive, indicating that the company has turned a corner in building out its suite of services. In H1, revenue is trending to close out the year 18% higher, which was nearly the same growth rate seen in 2023, with gross profit also showing a similar trend with respect to the previous year.
However, the growth in total expenses is spiking to be far higher than that seen in the previous year, with growth in stock-based compensation (SBC) seemingly poised to rise substantially for the first time since 2020. While the impact of SBC on EPS for the year remains to be seen, EPS trends outside of net effect considerations indicate that they will be quite strong and likely to be a net positive, unlike in all years prior to 2023.
Now, while CEO Alex Karp touted strong growth in the commercial user base in Q2, the picture is somewhat weakened when considering revenues across government and commercial segments:
Source: Company Information; Leverage Shares analysis
As of H1, there is a slight shift in the revenue mix seen in 2023 in that 1% of total revenue has effectively shifted over to the commercial segment. However, the share of the government sector’s contribution has (in fact) increased in Q2 relative to Q1.
Contextualizing Forward OutlookAs mentioned in an earlier article regarding the company’s Q4 earnings2, it is somewhat unfair to both the company and investors to describe Palantir as an “AI” company: while the company does own a number of AI-driven platforms, its business model is more akin to that of banks and management consulting firms wherein the greatest expense (and the greatest driver of revenue) are the people on board to manage clients. If framed as an analogue to banks or management consulting firms, SBC becomes a vanishing concern. If framed as a “technology” firm, high SBC would evoke questions.
The company’s core competency does lie in harnessing technology to deliver insights for their clients and its involvement with intelligence agencies spans well over a decade by now. This involvement, of course, makes a deep drilldown into determining its most successful practice or area difficult (if not impossible). In the course of the call, CEO Karp stated the company’s commitment to supporting U.S. interests in the region thus:
“The world is on the precipice of what could be a very severe set of violent interactions in the Middle East… It goes without saying that at Palantir, we know where we stand and we are very much supporting America and its allies in the Middle East, including Israel.”
With additional conflict being implied and its leadership position in delivering services to the government (and, by extension, the military and intelligence apparatus), the forward outlook on the company being able to monetize on this is quite rosy. On the other hand, a number of analysts had flagged3 the fact that the current souring of institutional investor sentiment over continued corporate spends on AI-related projects where the actual benefits have consistently been low while overall outlay being promised is orders of magnitude greater than the computation engine of global digital infrastructure currently in operation (some of which were highlighted in a recent article about TSMC4) highlights a likelihood of pullback on commercial spending, which impacts the forward outlook of this segment as proposed by Mr. Karp.
Over on the commercial segment, competition would be manifold and global. However, in the government segment, it’s likely that the company is included in a very short “preferred vendors” list. As it stands, the U.S. government is – by far – the biggest customer in the government segment: while total government revenues grew Year-on-Year (YoY) by $69 million to $371 million in Q2 2024, revenue from the U.S. government alone grew by $53 million to $278 million (or about 75% of total government revenue).
In ConclusionThe prospect of conflict raising certain stocks isn’t limited to Palantir alone: Lockheed Martin (ticker: LMT) also rose in value in the course of overnight trading on the 5th on the basis of a growing outlook that conflict particularly in the Middle East can be expected to grow. So, if the outlook is bearish for the company’s commercial segment, the government segment seems rather bullish.
It also bears noting that the company’s stock valuation in Price to Earnings (PE) Ratio on in Trailing Twelve Month (TTM) terms has described a trajectory of massive swings over the past couple that is steadily rationalizing well lower than that seen by the end of 2021.
Source: Leverage Shares analysis
However, as of close of trading on the 5th, the company’s TTM PE Ratio is 54.2% higher than that of “AI champ” Nvidia (ticker: NVDA).
While neither revenue nor scale is comparable to that of Nvidia, it could be argued that Palantir’s reach and service offering to select branches of the U.S. government makes it a different proposition. Be that is it may, the company’s stock valuation will be tested and price ratio rationalizations will likely continue.
Footnotes:
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If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website.
If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.
Risk Warnings
The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.
This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.
Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.
This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.
United States Visitors
The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.
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Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the “Advisers Act”).
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