Every moment in history occurs only once. The World is in constant dynamic change. As an investor, you are trying to build the future, predict it, and gently shape it. All at the same time. Your decisions have consequences, but so do decisions across the whole landscape. Through those lenses, let’s take a look at Palantir Q3 2022 earnings report, published on November 7th, 2022.
I am going to highlight certain aspects of the report that are of interest to all and every Palantir shareholder, both positive and negative including possible explanations or viewpoints.
Revenue grew 22% YoY to $478 million in Q3 2022, meaning Palantir is on the path to achieving a $2B run rate sometime in Q4, an important milestone. Of course revenue in itself is a crude metric, nice to observe on a quarterly basis, but in order to have a clearer insight into how it can grow not just this year, but the year after and the year after that, we have to look further. Below is the revenue growth for the past 3 years.
What I find more impressive and more indicative of future (yet delayed) success is customer count. From 203 a year ago, Palantir’s client list grew to 337, up +66% YoY. Palantir is in growth mode, the goal of the company at this point is to get its product on the screen of as many people, enterprises, and institutions as possible. And prove its worth.
Once you have acquired the client, you build more trust over time, and with every successful part of the transformation of the client’s enterprise, you become more intertwined in their ecosystem. And the more value you provide, the more you can ask for that value.
Palantir is set up to be an exponential company. The trick is, with exponential growth, it starts very slow. And in this phase, the client list is what matters.
In Q3 2022, Palantir closed 78 deals worth at least $1M, of which 32 are worth $5M or more and of which 19 are worth $10 or more. And this “closed deals” metric is important, but also a bit hard to track. Palantir is publishing different information every quarter and playing with numbers as they see fit. Not that they would be the only one, but it makes our job as investors harder and we would certainly appreciate to treat us with respect and clarity.
What improved from the previous quarters is the runway of the existing remaining deal value. Past few quarters it was oscillating around the $3.5B mark, and this quarter it finally broke past $4.1B.
That metric is the proof of the short-term growth where the remaining deal value is a short-term indication of whether the growth goals are certain or dependent on more new deals to be closed or the expansion of existing clients. And I would like to see this metric grow at faster clip, it should front-run the growth goals.
Let’s focus on the new clients for a moment now, because $1M of revenue from each might soon turn to $10M from each and more. That is when the beauty lies. Just imagine you keep your current client number and you expand revenue from each ten-fold. Of course that would not happen overnight, it is a process, but is a possibility, dare I even say probability that this will happen.
Each of Palantir’s clients has the potential to bring in 5-10x revenue over the rest of the decade as they grow alongside Palantir.
Platform of Platforms
You can often hear me refer to Palantir as the platform of platforms. What I mean is that at its core, Palantir is the software backbone for many industries and their own specific endeavors. What started with Skywise is now happening across other industries as explained on the slide below.
Palantir and Concordance are developing an ecosystem for the medical supply chain and simultaneously Palantir and Hyundai Heavy Industries are developing a manufacturing platform.
Both are not overnight projects. These will take multiple years to fully develop, however they will have a tremendous impact. Real impact. Tangible impact. The world and society is more fragile than many think and it needs to be maintained.
Do not take the things around you for granted. Energy, goods, services, manufacturing, all of these might get disrupted and might partially crumble if we do not take active steps to protect them.
Financial Fortress and Free Cash-Flow After Palantir Q3 2022
Now more than ever, a strong balance sheet is a must. With the recession on the table (and do not let anyone gaslight you into thinking otherwise) it is important to be able to weather the storm.
Palantir is positioned tremendously for this environment with one of the strongest balance sheets I have seen. $2.4B in cash and no debt is no joke.
And you know what is even better? Palantir does NOT need that anyway. They are generating Free Cash Flow. Not in excess, and you can hear some people complaining that it’s just negligible FCF, but that is the point. It is time to go hard and expand. Keeping FCF near 0 is the point of homeostasis. You are not bleeding money, but at the same time, all the excess is used to grow the business.
The role of the CEO, and well, the whole management team during a recession or other times of turmoil and difficulty changes, differs. And what is required ranges from company to company. Some need to cut costs, make the business leaner after times of gluttony, but well-managed companies can actually go on offense.
And that seems to be what Palantir is up to, and what is referred to as being cut for hard times. It does not mean that revenue or other metrics will just suddenly skyrocket, no, not at all.
But it means Palantir is here to “save the day” and make others to “owe them one”.
Palantir also grew its headcount by 36% since Q3 2021. The complete opposite of what we have seen past couple of months in the tech industry. Most of the Big Tech are laying off thousands of employees, not Palantir though.
Palantir is growing. Although, with growth comes pain. It will be crucial to integrate new employees and maintain the culture that made Palantir successful so far.
When In Doubt, Zoom Past Palantir Q3 2022 Results
Quarterly reports are always just a small blip in time. Opportunity to check the company, but they should have secondary standing to the overall qualitative trends, at least for investors. Investors that plan to hold the companies for many years. So what are the big trends to watch for?
Is data going to be more important in 2030 than today? I fully believe so. Is the economy of real assets going to need more insight over the next 3-5 years? And by real assets I mean physical goods, energy, transport – the things that make the world go around. Yes, it will. Is deglobalization playing to Palantir’s cards? Yes, as many of the relationships between physical assets will need to be re-established. And who can help with that? Palantir can.
As cynical as it is, the world is, let’s face it, almost always in some kind of crisis, and periods of peaceful content are relatively scarce.
Is Palantir Handling The Current Environment Well?
It is always challenging for investors to be presented with enough insight into a company. And to be honest, Palantir is not doing us any favor, the communication with investors is definitely sub-par. It feels like the management is tired of being a public company with additional oversight of the “public”. And frankly, that is somewhat reasonable when the world is falling apart and investors are bothering you about something as basic as the stock price.
For investors, this is reasonably annoying, but at the same time, it means that you are now buying shares with a “Karp discount”. Discount that market put on Palantir due to its lack of communication. This means if Palantir indeed continues to perform as a company and prove its worth. Shareholders that stick with the company through tough times will be rewarded by additional alpha.
Given the very tough macro and even tougher SaaS environment, I believe it is fair to say Palantir is doing mostly the right moves and simply going after it. We have been accustomed to smooth sailing for the past few years with extreme distortion post-pandemic, but this is what real operational environment looks like. It can get messy, so whether you invested in Palantir or basically any other company, expect 3-4 rough quarters.
What To Do With Your Shares After Palantir Q3 2022?
As an independent investor, you have to make the right decisions for the long-term wealthbeing and health of your portfolio. And often the worst possible action is a rash action. More investing mistakes are done through action than inaction. And given the overall sentiment, now is a great time to be buying, even though it feels like being punched in the stomach. And buy deliberately, stay the course, and keep buying great assets and very fair prices.
I firmly believe Palantir is going to be one of the companies that will outperform the broad market over this decade, but that does not mean they will outperform every year or that it is going to be a smooth ride.
Read also Christian’s take on Palantir Q3 2022.