Earnings season is in full swing and investors still have their eyes on one big thing: artificial intelligence (AI). Much of the buzz around AI is reserved for the “Mercenary Seven,” a catchy nickname that includes mega-cap tech giants. Microsoft, Apple, Alphabet, Amazon, Nvidia, MetaAnd You’re here. But that doesn’t mean no other companies are riding the wave.
With a market capitalization of just $51 billion, Palantir Technologies (PLTR 2.75%) may not be seen in the same light as big tech, but Palantir is also making inroads in the space, and investors realized that last week.
Following the release of a jaw-dropping fourth-quarter earnings report on February 5 after the market closed, Palantir stock soared approximately 50% over the next five trading days.
From revenue and operating margins to cash flow and customer acquisition strategies, Palantir has no shortage of key performance indicators for investors to drool over. Let’s analyze the report and what the company’s current performance could mean for its future. Although it operates in the shadow of megacap technology, now could be a lucrative time to invest in Palantir as it advances in the AI arms race.
Customer acquisition at its best
The year 2023 has been full of exciting developments in the world of artificial intelligence. Microsoft has invested billions in OpenAI, the start-up behind ChatGPT. Alphabet and Amazon quickly followed, each investing in a competing platform called Anthropic.
In an effort to stand out, Palantir created a unique lead generation strategy to help generate interest in its new product, its Artificial Intelligence Platform (AIP). Specifically, the company has started hosting immersive seminars it calls “boot camps.” During these sessions, attendees can try out Palantir’s software and better understand how the company can play a critical role in AI-driven generative use cases.
During Palantir’s fourth-quarter earnings conference call with analysts, investors learned that the company held more than 500 boot camps last year. It only held 92 in 2022. While it’s clear that boot camps are in high demand, an in-depth analysis of the company’s customer growth is worth a look.
Palantir had 497 customers in the fourth quarter, an increase of 35% from last year. Palantir is experiencing growing demand in the private sector in particular, with the number of customers growing by 44% annually.
That’s important because for many years, Palantir was hit by Wall Street declines due to the company’s heavy reliance on government deals. It is clear that the advent of AIP is creating demand and that activities outside of its traditional public sector activity are thriving.
Margins increase and cash flow increases
The chart below illustrates Palantir’s annual revenue over the past five years.
Palantir was founded in 2003, and the chart shows that it took the company almost two decades to reach the billion-dollar annual revenue milestone. And yet, in just three years, the company has doubled its turnover. This growth is staggering given the difficult macroeconomic outlook in recent years, coupled with a fierce competitive environment.
Perhaps more importantly, Palantir is also generating healthy margin expansion, which is directly reflected in its bottom line. After adjusting for non-cash expenses such as stock-based compensation, Palantir’s operating margin increased from 22% in 2022 to 28% in 2023. Additionally, free cash flow increased by 260% ‘year over year to reach $730 million.
Some things to consider
The combination of revenue growth and margin expansion has helped strengthen Palantir’s liquidity. As of Dec. 31, the company had $3.7 billion in cash and marketable securities, and no debt on its balance sheet.
While this is encouraging, investors should take note of the disparity between the company’s customer growth and its revenue acceleration. Even though the number of customers increased by 35% last year, Palantir’s total revenue increased by only about 17%.
To me, this indicates that Palantir is playing the long game when it comes to AI. In other words, boot camps are just a low-cost mechanism for drawing customers into the pipeline and converting them into paying users of the company’s software. However, through a combination of AI-anchored use case discovery and enhanced customer development efforts, Palantir has the ability to upsell and cross-sell customers over time. As such, the company should benefit from significant revenue acceleration over time.
I advise investors against buying into trendy narratives around Palantir. It will be important to focus on the long-term picture and assess the company’s position among AI enterprise software providers.
To me, the fourth quarter report was a preview of what investors could expect on an ongoing basis. As artificial intelligence software becomes a larger part of IT budgets, Palantir should be well-positioned to benefit from long-term tailwinds. Now seems like a great opportunity to acquire shares for new and existing investors, and prepare to stay the course for the long term. The journey seems to have only just begun.
Suzanne Frey, an executive at Alphabet, is a member of the board of directors of The Motley Fool. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Spatacco holds positions at Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Palantir Technologies and Tesla. The Motley Fool holds positions and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Palantir Technologies and Tesla. The Motley Fool has a disclosure policy.
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