Big-data analytics company Palantir (PLTR -0.23%) reported earnings on Monday, Nov. 7, resulting in an 11.5% drop -- the latest leg down in the stock's 70% decline over the past year. Curiously, the company actually beat revenue expectations. Revenue rose 22% to $478 million, beating expectations by nearly $3 million. However, adjusted (non-GAAP) earnings per share of $0.01 missed expectations by $0.01.
One would think that Palantir, with its top-of-the-line analytics software system used by the military and commercial enterprises, would be performing better. After all, with war between Russia and Ukraine and tensions swirling around China and Taiwan, along with other geopolitical hotspots flaring up after the pandemic, Palantir's big-data software should be in high demand.
The thing is, Palantir's software actually is in high demand, and some underlying metrics point to a positive long-term picture. Yet there appears to be one big hole in its revenue trajectory, as well as a big cost headwind keeping a lid on its bottom line.
Unfortunately, it appears the stock likely won't rise again until these two factors are taken care of.
Palantir is racking up commercial customers
With the stock down, some may think Palantir's customers are slowing their adoption of the platform. However, this doesn't appear to be the case.
In fact, Palantir was able to grow its overall customer count by 66% year over year and 11% quarter over quarter -- which was impressive. Other impressive metrics include the total number of deals closed, which were up 63% from last year. Total billings, which include the change in revenue plus the change in long-term contract value, was up 47%.
The company's recent presentation also showed a number of major commercial-customer testimonies, illustrating how Palantir's big-data software has helped their businesses save lots of money. For instance, Tyson Foods claimed Palantir's software saved it $200 million across 20 projects, while insurance-giant Swiss Re said it had achieved "nine figure" savings due to Palantir's software. Other major customers also had positive things to say about the software giant.
The big hole in Palantir's results
With that huge customer and billings growth, it's a bit strange that revenue only rose 22%. And it's doubly strange that the supposed lower-growth government segment actually rose 26%, above the company average. U.S. commercial-revenue growth continued its strong performance from last quarter, up 53%, making the overall 17% commercial growth all the more perplexing.
That leaves international commercial revenue as the huge shortfall here. In fact, given that U.S. commercial growth was so strong, it actually appears international commercial-revenue growth may have been negative!
On the conference call with analysts, management called international commercial revenue "about flat," due to the strong dollar and other headwinds. CEO Alex Karp also called out European companies as generally being less willing to embrace new data-driven ways of doing things, compared with more innovative U.S. companies, which may point to some cultural headwinds in the region in addition to the strong dollar.
Palantir won't rise again until this happens
Like many other software companies, Palantir has a tendency to report "adjusted" metrics, which makes the company seem more profitable than it actually is when factoring in its very generous stock-based compensation. Last quarter, Palantir paid out $140 million in stock-based compensation, which was enough to flip "adjusted" operating earnings of $81.3 million to a GAAP operating loss of $62.2 million.
That $140 million also amounted to nearly 30% of revenue and nearly 1% of the company's current market cap. While 1% dilution per quarter isn't that great for equity shareholders, on the bright side, Palantir has decreased its outsized stock-based compensation from last year. In last-year's third quarter, stock-based compensation was an even greater $185 million.
High stock comp in lieu of cash payments is enabling Palantir to build cash every quarter, which is good for the company's durability in this environment. Currently, its corporate cash totaled over $2.4 billion, with no debt. So it's not like Palantir is in any danger of insolvency, nor is it in need of outside funding.
However, with interest rates so high and software investors now looking much closer at GAAP profitability, one can probably count on investors to discount Palantir's growth until it can generate profits over and above its stock-based comp.
With geopolitical threats proliferating all over the world and businesses increasingly depending on big-data analytics for cost savings in this age of inflation, Palantir seems like the perfect stock for these times. However, until the company begins to either generate real GAAP profits over and above its large stock-based compensation, it may be difficult for Palantir to rise to its old highs anytime soon.
