Turning Into a Free Cash Flow Powerhouse


As Palantir (NYSE: PLTR) shareholder, I couldn't be happier with its rise of around 35% after earnings. The AI-powered data analytics and intelligence software company impressed investors, highlighting the strong popularity of bootcamps, growing adoption of AIP (Artificial Intelligence Platform), and improving profits. Management expects continued acceleration in its commercial division. In the meantime, Palantir is gradually transforming into a free movement of capital central.

That said, while I will remain invested in Palantir for its long-term prospects, I have now adopted a neutral stance following the stock's massive gains.

Bootcamps Drive Explosive Business Growth

One of the highlights of Palantir's fourth quarter report was how the company managed to drive explosive growth in its business division. Just to break it down a bit, Palantir's business is divided into two parts: government (bringing 53% of revenue) and commercial (raking in the remaining 47%). Now, as the government side continues to grow quite quickly, posting 11% growth in the fourth quarter, the real excitement is brewing in Palantir's commercial division.

Indeed, Palantir's commercial division far outperformed its government business, with revenue growth of 32% year over year. This was driven by a massive 55% increase in Palantir's customer base, which now includes 221 companies. The rapid customer success here can be attributed to Palantir's implementation of a very demonstrative customer acquisition strategy: bootcamps.

What are bootcamps for?

Palantir bootcamps serve as intensive, hands-on workshops designed to showcase the capabilities of their products, particularly Palantir AIP.

Palantir's strategy here is literally to cold approach CEOs and CTOs, urging them to put their best AI teams to the test. In Palantir's words, such an approach generally looks like this:

Take everything you've done in AI, hire your best people, and we'll mine your data in a 10-hour bootcamp. Compare your results to our operational and commercially valuable results. Our 10 hours versus your 10 months. Whatever products, suppliers or hyperscalers you choose, we will be there.

Fourth Quarter Earnings Call

Sure enough, many executives have expressed interest in trying Palantir's platform, especially given the buzz Palantir has generated in the tech space. Demand for these immersive “workshops” has increased, so Palantir has not only met, but exceeded previous expectations. Palantir has completed an impressive 560 sessions since October, a feat that already exceeds its initial goal of 500 in the space of a year.

The Effect of Bootcamps on Revenue Growth

Palantir's bootcamp strategy has played a crucial role in driving revenue growth within the business unit and company-wide. In fact, Palantir management has highlighted that the company has closed significant deals through this approach. Seeing firsthand the tangible results Palantir can bring to businesses, other business leaders are compelled to embrace this transformative technology, recognizing it as an opportunity they cannot afford to overlook.

To name a few, Palantir has signed deals:

  • Exceeding $25 million each, with

    • one of the largest car rental companies, one of the largest telecommunications companies and one of the largest pharmaceutical and biotechnology companies in the world.

  • Exceeding $10 million each, with

    • a U.S. consumer packaged goods holding company, a U.S. manufacturer of automotive seats and electrical systems, a comprehensive healthcare network in the Midwest, and a large-scale battery manufacturer.

  • Exceeding $5 million each, with

    • a U.S. bank holding company, a horse racing regulator, one of the world's largest equipment rental companies, and one of the largest independent, nonprofit QSR cooperatives.

And these are just a few examples.

The bar chart below, from Palantir's Q4 presentation, clearly illustrates the success of bootcamps in increasing the number of commercial customers. Specifically, on a trailing 12 month (TTM) basis, Palantir's commercial customer base grew 22% quarter over quarter. This implies a fantastic acceleration from the equivalent figures of 8%, 4% and 12% achieved in the first, second and third quarters respectively.

Given the impressive momentum in Palantir's commercial customer base, it's clear that Wall Street is likely looking at a scenario of accelerating revenue growth in the coming quarters. Palantir management itself justified this expectation by providing forecasts that U.S. commerce revenue would exceed $640 million in fiscal 2024, indicating a growth rate of at least 40%. This further reinforces the optimism surrounding the company's trajectory.

Palantir: generates free cash flow, but valuation concerns emerge

With strong revenue growth of 20% to $608 million in the government and commercial sectors in the fourth quarter, Palantir is gradually taking advantage of its unit's improving profitability and transforming itself into a free cash flow machine.

To add some color to Palantir's overall profitability, the company's adjusted operating margin jumped to 34% in the fourth quarter, up from 22% a year earlier. This is the fifth consecutive quarter of increased adjusted operating margins and the fifth consecutive quarter of positive GAAP net income.

GAAP net income was $93 million, a margin of 15%. Yes, Palantir is now very profitable, even on a GAAP basis, and margins are only starting to increase. Sure, that $93 million includes $44.5 million in interest income from its $3.7 billion cash position, but profits are profits, especially since they're calculated on a GAAP basis.

But let me return to free cash flow, which came in at $305 million on an adjusted basis, which represents a 50% margin. Note that this figure includes $132.6 million in stock-based compensation (SBC) expenses and should therefore be taken with a grain of salt. That said:

  • a) Even excluding SBC, this represents a huge free cash flow margin of over 25%.

  • b) This shows the extreme potential for Palantir's free cash flow growth as its overall margins increase.

  • c) The SBC total actually declined year over year in FY 2023, which is certainly encouraging.

Management's guidance actually indicates this potential, as it expects adjusted free cash flow to be between $800 million and $1 billion. I think this estimate is very conservative, given the undeniably incredible momentum with which Palantir finished fiscal 2023 and current margins, which are poised to continue growing from here.

Regardless, even these numbers show how quickly Palantir is transforming into a free cash flow powerhouse. As a reminder, two years ago in fiscal 2022, adjusted free cash flow was just $203 million.

Has Palantir stock become too expensive?

Despite Palantir's operational excellence, it's hard to ignore that shares may have become too expensive. At 51 times the high end of management's adjusted free cash flow guidance range for this year, no further evidence is needed to argue that Palantir is trading at a massive premium.

Even if exponential growth in the medium term could ultimately justify paying this multiple today, significant volatility in the share price should be expected. Due to the now significantly thinner margin of safety compared to previous quarters, I changed my stance on the stock from bullish to neutral.

Is PLTR Stock a Buy, According to Analysts?

Current sentiment on Wall Street appears somewhat more guarded following the stock's massive gains. According to Wall Street, Palantir Technologies has a Hold consensus rating based on three Buys, five Holds, and five Sells. over the last three months. At $18.20, the average PLTR stock price target suggests a downside potential of 25.35%.

If you're wondering which analyst to follow if you want to buy and sell PLTR stock, the most profitable analyst covering the stock (over a 1-year period) is Mariana Perez of Bank of America Securities, with an average return of 70.89. % per grade and a 100% pass rate. Click on the image below to learn more.

Takeaways

Palantir's fourth-quarter performance, fueled by its impactful training camps and growing demand for its product, propelled the stock to impressive gains. As a shareholder, I couldn't be happier with the recent gains.

According to management's guidance, the phenomenal revenue growth of the Commercial division is expected to accelerate further. Meanwhile, given the company's high-margin business model, Palantir's free cash flow generation has immense potential. I will continue to hold the stock for these reasons and the fact that I see Palantir dominating the AI ​​decision-making software space.

However, despite these positive indicators, there are concerns about the stock's high valuation. As a shareholder, I remain optimistic about Palantir's long-term potential, but given the recent rally, I have taken a neutral stance, lowered my expectations, and prepared for a increased volatility ahead.

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