Why Palantir Surged More Than 20% This Week

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What happened

Shares of software company Palantir Technologies (NYSE: PLTR) surged this week, defying an otherwise tough week for stocks, with shares up 22.5% as of 3:08 p.m. EDT Friday, according to data from S&P Global Market Intelligence.

The big data software pioneer reported earnings on Monday, February 13, delivering a strong beat — especially on the bottom line.

Given that investors have been wringing their hands over the ultimate profitability of software stocks in general and that Palantir had previously forecast it wouldn’t be profitable until 2025, the company’s delivering net profits on a GAAP basis was certainly something to cheer.

However, those GAAP profit figures — while impressive — might be a tad misleading.

So what

In the fourth quarter of 2022, Palantir grew revenue 17.5% to $508.6 million, above analyst estimates, and delivered adjusted (non-GAAP) earnings per share of $0.04, beating expectations by $0.01.

However, not only did Palantir deliver adjusted profits, it actually delivered $30.9 million in GAAP net profits, or $0.01 per share. That was certainly surprising, given that most investors and even Palantir itself hadn’t forecast GAAP profitability until several years out. Furthermore, management said it expects the company to be profitable on a GAAP basis in 2023 as well.

On the conference call with analysts, CEO Alex Karp said: “We promised you GAAP profitability in 2025, which you thought would be in 2027 perhaps. We are now, in the last quarter, GAAP profitable, and we plan to be GAAP profitable in this year.”

However, while that accomplishment is no doubt impressive, especially considering Palantir had a massive net loss of $520 million in 2021, the company wasn’t actually profitable on an operating basis last quarter. In fact, Palantir had an operating loss of $17.8 million in the fourth quarter.

The net income figure was helped by one extraordinary, nonrecurring gain from the acquisition of Palantir’s joint venture in Japan, which resulted in a $44.6 million gain in “other income.” In addition, Palantir has a large amount of cash — about $2.6 billion — on its balance sheet, and with short-term interest rates now much higher than last year, the company earned another $12.8 million in interest income last quarter alone.

Yet while last quarter’s GAAP profits were a little misleading, it was certainly a good quarter and a good year for Palantir. In addition, it’s a positive sign that management projects continued GAAP profits in 2023.

Of note, while Palantir’s government business grew a solid 22% in the fourth quarter, management took pains to point out the huge progress made in its commercial segment. The company’s U.S. commercial revenue grew 67% last year, although management again pointed out that its larger international commercial segment has been slower to adopt Palantir’s solutions. Also impressive, Palantir’s customer count grew 55% in 2022, paving the way for more revenue growth since these new customers are likely to expand their usage next year.

Now what

Palantir is a fascinating company because its software is used by the Department of Defense and other military institutions in the most important global conflict arenas. Moreover, its solutions have begun taking off with commercial customers in a bigger way over the past few years too. In fact, while Palantir is over 20 years old, its commercial business is fairly new. Since 2018, Palantir’s U.S. commercial revenue has grown from just $38 million nearly 10 times over to $335 million in 2022. Overall commercial revenue reached $834 million last year.

Still, there are some risky elements to Palantir. For one, its sales trajectory is highly unpredictable and dependent on inking large customer deals that happen in an uneven fashion with varied pricing. That’s different from a lot of subscription-based SaaS companies with more predictable, recurring subscription revenue.

Second, Palantir currently trades at about 10 times this year’s revenue estimates, which isn’t exactly cheap. However, if you strip out the company’s excess cash, that multiple falls to a more palatable 8.5 times sales.

Ultimately, an investment in Palantir is a leap of faith in CEO Alex Karp and his team as well as faith that Palantir’s mission will yield bigger financial rewards in the years ahead. While still well off its all-time highs, the stock is not that cheap for its current growth rate. That being said, its products appear quite impressive.

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Billy Duberstein has no position in any of the stocks mentioned. His client may own shares of the companies mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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