$Palantir(PLTR.US)$ IPO’d around a year ago, and while the stock has performed relatively well, investors are pretty polarized on the company’s future prospects.
On the one hand, the company is growing rapidly, enjoys high-quality revenues, and its business model is highly scalable, resulting in fantastic margins.
On the other, Palantir remains unprofitable, is likely to keep diluting shareholders, and competition may eventually catch up in the meantime.
In my view, the positives outweigh the negatives in Palantir’s investment case. For this reason, I am bullish on the stock.
The Bull Case
The foundation of Palantir’s bull case lies in the company’s hyper-growth capabilities. Revenues grew 49% year-over-year to $376 million in Q2, with the company’s Commercial segment growing 90% year-over-year.
Palantir continues to sign new multi-year contracts, expanding its future incoming cash flow backlog. During the period, the company closed 62 deals of $1 million or more, of which 30 deals are worth $5 million or more, and 21 deals are worth $10 million or more.
What’s attractive about these contracts is that through them, Palantir enjoys recurring revenues. Essentially, with every new client the company signs, it adds another source of revenue, with the potential that a client may expand their contract in the future, bringing in even more money.
Additionally, what truly makes Palantir’s revenues great, is that a significant chunk is sourced from the U.S. government and its allies. Defaulting defense contracts is essentially unheard of, so Palantir faces minimal counterparty risk.
Overall, Palantir’s revenues are likely to keep expanding rapidly moving forward. Being a leader in the counter-terrorism space, this niche market is not easily penetrated as well.
The Bear Case
On the downside, there are some concerns that Palantir investors have been discussing lately. Firstly, bears would claim that the company remains unprofitable. Now, this statement is not very clear.
The company’s gross margins hover north of 75%. A large chunk of expenses is essentially reinvesting towards future growth, which again, is nothing investors shouldn’t like. Finally, excluding the massive stock-based compensation, Palantir is not as unprofitable as it seems.
In fact, excluding the $232.7 million stock-based compensation in Q2, the company actually reported an adjusted income from operations of $116.7 million.
One would be right to state that such an excessive stock-based competition is diluting shareholders at a rapid pace. However, employees owning a larger chunk of the company over time, hopefully aligns their interests with shareholders as we advance.
Additionally, due to the stock trading at a relatively rich valuation at 25.3 times forward sales, the company is not printing extra stock on the cheap. The premium valuation helps in that regard.
Finally, it’s true that competition may threaten Palantir’s dominance in the future. For instance, news came out recently that Palantir may be set to lose a fruitful contract it has with Immigrations and Customs Enforcement over an alternative tool.
Still, no significant signs of such a trend have arisen, and Palantir’s close relationships with governments should be proven quite strong.