Palantir This fall Earnings Preview: Could Get Higher Earlier than Getting Ugly

Why Am I Upgrading Palantir to Impartial?

In every week, Palantir Applied sciences (NYSE:PLTR) will launch This fall 2022 numbers [February 13, post-market], which I believe may beat market expectations concerning income development. With the identical adjusted margin as final quarter, PLTR can be prone to beat EPS estimates. Consequently, I’ve determined to improve the inventory from Promote to Maintain. Nevertheless, this improve doesn’t refute my earlier thesis that the corporate is kind of costly and faces intense competitors in its key finish markets – if latest fears of a recession come true, I believe the inventory will hardly be capable of please its traders this yr.

This fall FY2022: Why It Could Get Higher?

Since October fifth, 2021, I’ve revealed 10 bearish articles on Palantir stock on In search of Alpha. Again then, the bulls had been forecasting a free money movement margin of 40% for the subsequent 10 years, and a few had been even projecting the corporate’s gross sales development 25-30 years into the long run with an exit price-to-sales a number of of 2-5x. This appeared like full nonsense to me, as a number of contraction is a typical factor for fast-growing corporations – many bulls appeared to miss or underestimate its impression on PLTR’s market cap, which was value greater than 31x gross sales in October 2021.

Time handed and I saved updating my bearish thesis based mostly on PLTR’s a) costly valuation, b) SBC practices that saved diluting retail traders, and c) enterprise mannequin that reveals some signs of failure. What stays of those arguments in the present day? Palantir inventory trades at 7.6 instances income, 29 instances EBITDA, and 52 instances web earnings [all numbers are 1-year forwarding]. And that is loads – nonetheless. From December 31, 2021, to January 1, 2023, PLTR’s common shares excellent [on a quarterly basis] are up solely 3.01%, which isn’t a lot, however the entire time administration has been getting their inventory bonus, they’ve been selling it instantly on the open market – regardless of the precise purpose, that reality didn’t assist the inventory climate the storm in 2022 and won’t assist it in 2023 – if there’s one other one. The third level of mine – now associated to the failed enterprise mannequin – was additionally seen in the best way the corporate reported for Q3 FY2022 and deviated from its personal development plan:

Now, nonetheless, I believe that subsequent week the corporate ought to report higher than the market expects – no less than by way of income development.

I reached this conclusion after analyzing the latest This fall 2022 outcomes of Palantir’s friends, taken from Financial institution of America’s record as of February 2nd, 2023 [ZeroHedge’s proprietary source]:

Palantir is on the BUY record – its protection was initiated by Mariana Perez on June 21, 2022, and since then the financial institution’s value goal has elevated by $1, or ~7.7%. However that is not an important factor I would like you to concentrate to. Of the 19 names on the BUY record, 7 firms akin to PLTR have already reported This fall 2022 numbers. And my evaluation reveals that even this restricted pattern of firms can predict Palantir’s income development for This fall FY2022:

Since Palantir went public in late September 2020, its gross sales had been rising quarter-to-quarter [QoQ] consistent with the relative dynamic of how the mixed income of these 7 firms was rising. The brightest deviation from that correlation was seen in Q3 2022 when Palantir underperformed this explicit peer group [by a margin of >2x]. Now the Road waits for PLTR’s QoQ gross sales development of ~5.7% – that is amid the group’s precise gross sales development price of 8.12%. If the historic relation comes again to the place it was earlier than Q3 2022, I believe PLTR’s This fall outcomes ought to be larger by way of income.

This conclusion is confirmed after we increase the pattern to take into consideration the names included within the NEUTRAL and UNDERPERFORM lists – out of 38 names [in total], there are 14 which have already reported This fall figures.

Mixed gross sales of those 14 firms grew 12.8% QoQ in This fall FY2022 – greater than double PLTR’s consensus forecast. Normally, the market expects Palantir to return to its Q2 2022 QoQ development price, whereas the broader pattern has greater than doubled that interval’s development price.

In opposition to this backdrop, if the corporate manages to take care of and even enhance its margin, then precise EPS numbers ought to mechanically exceed the $0.03 per share that’s priced-in in the present day. However there are huge elementary dangers that can’t be offset by 1 good, stronger-than-expected quarter.

Publish-Earnings: Why It Can Get Uglier?

The reality is – regardless of the corporate’s “distinctive choices” – Palantir is unlikely to do away with competitors in its finish markets. At one time – no less than from what I commonly learn from bullish authors – the corporate was unbeatable in its Authorities section. Supposedly, that reality alone and the mass of underlying authorities contracts ought to be sufficient to justify all of the hopes pinned on PLTR’s “30% CAGR over the long term” regardless of the plain competitors within the Business section.

There was a major quantity of negativity surrounding the corporate on the finish of January, which hasn’t been seen because the publication of its Q3 FY2022 report – that is after I found that the corporate is going through elevated competitors in its authorities section:

In late January, Peter Thiel called the British folks’s affection for the state-backed well being service “Stockholm syndrome” – and that is amid its firm vying for a £480 million ($595 million) knowledge contract with the Nationwide Well being Service.

Palantir’s Foundry software program was utilized in the course of the Covid-19 disaster to observe vaccine distribution and, extra just lately, handle the backlog of sufferers ready for non-emergency surgical procedures. Nevertheless, the corporate’s partnership with the NHS has confronted criticism from civil liberties organizations that claim that Palantir has an unfair benefit in securing contracts over rivals.

Simply days after these phrases from Thiel, the Telegraph reported that C3.ai (AI), a U.S. synthetic intelligence firm based by billionaire Thomas Siebel, can be competing for a similar multi-million greenback contract from the NHS. Quantexa, a UK knowledge firm, has additionally publicly declared it should bid for a job on the NHS knowledge venture.

Old cases have surfaced in public that Palantir might have been dishonest in acquiring its contracts with the NHS, which I consider might have a detrimental impression on acquiring new contracts sooner or later. Reputational dangers pose an awesome hazard to the enlargement of the corporate’s backlog, for my part.

Thus far, analysts are nonetheless fairly beneficiant concerning the firm’s development prospects – in accordance with the consensus estimates of 13 analysts, gross sales will develop steadily by greater than 22% [annually] over the subsequent 2 years, whereas adjusted EPS will improve many instances over:

On the identical time, the corporate is valued at 50 instances subsequent yr’s web earnings – I’ve included a comparability with the valuation of the median firm within the pattern from the BofA record [see charts above]. Within the “ALL” pattern, the median firm is greater than 2 instances cheaper than PLTR, and on the identical time, the expansion was significantly better [QoQ], no less than for Q3 2022.

I believe the competitors within the type of C3.ai is a reasonably vital sign for PLTR traders that they should watch the NHS case very carefully. Below the present circumstances, I consider it will likely be more and more troublesome for PLTR to satisfy the income and EPS targets set by analysts – particularly with out changes for SBC and different adjustable objects.

Backside Line

Regardless of the various dangers inherent in my conclusions in the present day, one factor stays unchanged – the bullish sentiment that has prevailed out there since December 2022 isn’t justified by the macro indicators. That is undoubtedly true for the seek for the underside of the market – jobless claims and ISM manufacturing studies inform us that we now have not arrived there but:

The highest a part of the chart says that we now have by no means reached the underside with out no less than a reasonable improve in unemployment. The underside one says we have to see a sustained turnaround in building begins and PMI. How is that associated to PLTR? It doesn’t matter what anybody says, this inventory continues to be too costly for the expansion it affords – so when a recession comes, PLTR’s robust correlation with the ARK Innovation ETF (ARKK) will doubtless drag the inventory right down to a extra affordable valuation degree.

Due to this fact, I anticipate better-than-expected This fall FY2022 outcomes from the corporate subsequent week – in that case, they may result in a brand new wave of optimism. Nevertheless, it’s unlikely that this optimism will flip into actuality, because the longer-term consensus forecasts are nonetheless too excessive to be reached, for my part – particularly on the daybreak of future inventory market difficulties.

Shopping for PLTR earlier than the report is as much as you. I will be watching it from the sidelines in the event you ask me.

Thanks for studying!