Red = Wall Street.
Palantir recently reported mixed earnings for their first quarter 2022 report, leading the stock to plummet over 20%. Palantir evidently is a majorly unconventional company with their SPAC initiatives, charisma from the CEO & their overall ideological perspective of protection of the West. In comparison to conventional companies on the stock market, this is majorly unconventional & goes against traditional normalities.
Within recent exclusive reports gained by Darntons, these initiation notes highlight the negative perspective Wall Street has on Palantir.
Firstly, RBC within their initiation note mention how RBC has downgraded Palantir to a $6PT highlighting the following main takeaways:
- Firstly, RBC mention how revenue growth ex-SPACs has decelerated for the 4th consecutive quarter. RBC states how revenue growth excluding SPACs has decelerated again, to 19% y/y, and the 2Q guidance has implied a further deceleration of 18% y/y.
Wall Street has historically been sceptical of the SPAC programs as it is often perceived as a method of “buying revenue.” This is in comparison to the more optimistic Palantir investors whom state that the SPAC investments is a program focused on Palantir battle-testing their software within the context of smaller companies, and therefore leading towards deep competitive moats to be created.
This will enable Palantir to gain insights into the needs and necessities of small start-ups, and the ability to identify innate weaknesses and strengths of their current software’s. Overall, we believe that this unconventional approach to business is reinforcing the ideological view of Palantir – namely their anchoring towards a 10+ year vision. Whilst Palantir current do not have any viable competitors within the OS scene, recent commentary has suggested that there is much concern over big-technology giants, such as Google, eventually competing within the OS space against Palantir.
We understand that through this unconventional business model, there is huge distrust and pessimism towards the philosophy of Palantir and the viability of their product. Whilst the unconventional model has strengths, there are also evident downfalls towards the methodological approach to business.
Damaging to the underlying EPS of the company is the most overlooked factor of the strategic initiative. Palantir experienced a major miss on EPS. This is explained through the unrealised losses from strategic investment programs, which thereby have caused a misleading representation of EPS for the quarter. Evidently, this highlights a major flaw within Palantir’s investments, as it is likely within the next few quarters that these unrealised losses will continue to damage the underlying EPS bottom line.
In addition to this, it is likely that a range of these SPAC initiatives will not succeed in the future, thereby causing a potential loss of upwards of $450M from the perspective of Palantir. In consideration of the potential upcoming recession, as well as the overall concern regarding the future of the economy, there should be an emphasis on these SPAC business initiatives failing.
- Furthermore, RBC states how Government revenue growth has decelerated again for the 5th consecutive quarter, whilst the commercial ex-SPACs has also slowdown to 25% y/y (vs. 27% in Q4).
Palantir’s Governmental business has significantly halted during the FY21, and seems to be experiencing significant slowdowns in comparison to previous quarters. There are two evident sides to this debate that must be taken into consideration. Palantir bulls, point towards the Federal Budget delay to explain the deceleration within Palantir’s Governmental business: “Congress were operating under a CR, or continuing resolution, as a temporary measure to fund Government activities for a limited amount of time. This posed the Chiefs of the Air Force and Space Force to disclose their frustration and devastation for the matter, in relation to the inability to perform missions and to grow new capabilities.“
Within recent times the Palantir Defence Leader expressed his concern with the Governmental acquisition processes. There is so much friction associated within Governments and these acquisition processes can make it very hard for companies to “break-in” successfully. However, Palantir has an evident edge within this sphere, because often Palantir is competing with PowerPoints, or CIOs whom are showcasing a product they hope to build within the next few years. Doug mentioned how these CIOs, and PowerPoints showcasing a product never end up succeeding, and if they do, often the cost associated is 10X greater.
The alternative side of the debate is that Palantir is failing to successfully gain contracts from the Government based on the increased competitive environment present. ARK Invest, Cathie Wood, indicated her concern regarding the Palantir customer count from the Governmental sphere, and concluded that this stagnation was due to increased competitive environments, and an inability for Palantir to gain sole-sourced contracts.
COO Sankar mentioned within the earnings call that the Government upside is large.
This lumpiness comes down to contract timing and events occurring. “We will not deprive customers with software – just because the paper work is not there.” The COO concluded that there would be meaningful upside within Governments in the next few quarters.
Furthermore, RBC mentions how:
- Backlog for Palantir majorly decelerate again. Total deal value y/y growth decelerated for the 3rd consecutive quarter, and TDR growth was actually negative for the first time since Q1 2020.
Total Contract Value is the potential revenue associated with the contract and estimated at the commencement of the contract. The fact that TDV has decelerated for the quarter, indicates a possible slowdown within the context of Palantir’s business model, or the fact that Palantir is signing smaller contracts over time.
However, in consideration of the fact that Palantir is now modularising their product, in order to ensure that the product in “thinner”, and experiences less friction in terms of integration – this perhaps can reveal why this figure has dropped.
Palantir must modularise their product in order to enable an easier integration process within companies. Palantir offers a holistic, invasive OS, and therefore this can be perceived as overwhelming and unnecessary for some companies.
Instead of offering a holistic OS, Palantir through cutting down their product to fit a specific use case, is likely to aid the selling procedures for the software firm.
An example of the modularity Palantir is now experiencing is through:
“Rolled out Hospital Operations Suite
as a module — now used by hospitals
covering 37,000+ hospital beds across
the US, up from 1,000+ on Jan 1″
- Wall Street have indicated their scepticism over Palantir 30% growth for 2022 & throughout 2025. RBC goes on to say how, this backlog deceleration “implies revenue growth should continue to decelerate”. Therefore, RBC conclude that this idea of 30% growth for the full year seems unrealistic. In consideration of the fact that management has implied this guidance of 30% to be maintained, this suggests serious 2H improvements to achieve this goal.
- The peak of the SPAC initiatives is problematic for RBC. This is because, whilst RBC originally were bearish on the SPAC initiatives, as it was perceived as a way of buying revenue , RBC believes that the underlying business is weak and therefore reiterating the idea that management can not maintain this 30% view of growth throughout 2025.
Palantir, since inception, have battle-tested their software within the context of intelligence agencies, and the Governmental sphere. We believe that this initiative was paramount for the success, and viability of Palantir’s’ current products. This is because, throughout the Government sphere, Palantir over an 18 year period were trailing, testing, and adapting their software within some of the harshest conditions possible.
Investors within Palantir believe that this is similar in terms of the SPAC programs.
The philosophy of SPAC indicatives is very similar, if not identical. This is because, through the SPAC initiatives, we believe that this is a methodological approach for Palantir to test, trial and adapt their software to the needs of smaller companies, and early stage start-ups.
- Margins were also problematic for the Street. Namely, despite the fact guidance was maintained at 27% operating margins VS 30% for FY 2021, the 2Q 2022 guidance was solely 20%. This indicates little room for upside within the FY guidance.
Darntons wrote that there are a few potential reasons as to why ADJ Operating Margins are decreasing, and will continue to decrease through-out FY22. Whilst stating this, it is vital to note the company has guidance still for 27% ADJ Operating Margins throughout FY22.
The reasons as to why ADJ Operating Margins are decreasing includes:
- Increased marketing expenses
- Gaining smaller sized contracts from smaller organisation.
Holistically, RBC were majorly discouraged by the utility of the earnings report, stating their new PT of $6 based on a 4.3X multiple.
Interestingly, RBC did state that total sequential net customer adds was the sole “bright spot” for Palantir within the quarter. This is because, Palantir added a record 40 customers for the quarter, 37 coming from the commercial sphere. This leads to the conclusion that total customer count now amounts to 184 Commercial, with 93 Governmental adds.
In regards to the TTM revenue for Palantir per customer, this was down to $5.9M, down 27% y/y in which reflects the dilution from net-new customer additions. On the other hand, revenue per top 20 customers was $45M, up 25% y/y.