Recent major developments have changed the conversation and the direction surrounding Wall Street and tech stocks. First, the generative chatbot ChatGPT stunned the tech world. Many companies, like Alphabet, were seemingly caught flat-footed and are now on their horses to roll out their artificial intelligence (AI) tools. Microsoft invested billions in ChatGPT's maker, OpenAI, in a bid to eat into Google Search's domination over Microsoft Bing.
Then, Nvidia shocked the investing world with its first-quarter results and outstanding guidance. Its stock is up 190% year to date, and the rising tide is lifting many boats, as shown below.
One of these names is Palantir Technologies (PLTR 0.13%). Legendary investor Peter Lynch says, "Know what you own, and know why you own it," so let's look at three things investors, or potential investors, must know about Palantir.
1. Palantir is synonymous with data
The first thing to know is that Palantir was harnessing data using machine learning (ML) and AI way before the current hype. Its products, Foundry and Gotham, are cloud-based customizable platforms that governments and private businesses use to harness massive amounts of data from different sources (databases, emails, spreadsheets, etc.). And the platforms allow for queries, modeling, and other actions that ultimately lead to better decision-making.
Palantir's latest platform, AIP, enables governments and businesses to securely integrate large language models (LLMs), which answer questions, create original content, and interact with users in a humanlike manner.
In a real-world example provided by Palantir, a complex manufacturing and distribution company that is in the path of a storm can use Palantir's AI to track its trucks, parts, and orders that are in progress, assimilating the data much more efficiently than a human operator. The user can then query the company's LLM to determine which orders would be affected and take the proper action to minimize disruption.
Gartner recognized Palantir as a visionary in its 2022 Magic Quadrant for data integration, while the Forrester Wave for AI/ML Platforms for Q3 2022 report classified it as a leader, the highest possible position. This know-how is why more and more defense departments, governments, and businesses rely on it, including the U.S. military and Ukraine as it defends its territory from the Russian invasion.
2. Growth is the name of the game right now
Much was made of the fact that Palantir achieved profitability under generally accepted accounting principles (GAAP) last quarter, but the company's $0.01 per share in earnings aren't the big story. The company is all about growth in customers and sales at this point.
One of Palantir's initiatives in recent years is expanding its customer base beyond governments into more commercial businesses. Execution is high, with total customers increasing more than 150% over the last two years, while sales reached $2 billion over the trailing 12 months, as depicted below.
Data source: Palantir. Chart by author.
Of the 114 customers added this past year, 96 came from the commercial side. This is excellent news because, while governments have deep pockets, there is a vast market of commercial businesses to tap for growth.
Palantir expects revenue to grow 16% to reach $2.2 billion for fiscal 2023 and to retain its GAAP profitability. The token profits are excellent since they indicate that the company can be very profitable once it scales up. But investors should look at the top line and customer growth figures as the key performance indicators at this stage.
3. The elephant in the room
You have undoubtedly heard about the dreaded stock-based compensation (SBC) if you have followed Palantir. First, the basics: What is SBC? Companies reward executives and employees by offering them shares of stock in the company, usually in addition to salary and cash bonuses.
SBC increases the number of outstanding shares, thereby diluting (or decreasing) the value of each share. In layman's terms, each share represents a smaller piece of the pie when the total number of shares of a company increases. In 2022 alone, Palantir expensed $565 million worth of SBC -- a whopping 30% of sales -- and the diluted share count has grown 24% since 2021, as shown below.
PLTR average diluted shares outstanding (quarterly) data by YCharts.
What rarely gets talked about is that SBC has several advantages, such as:
- Aligning employee and investor goals (both make money when the stock price rises).
- Saving a growing company much-needed cash. Palantir has amassed a war chest of $2.9 billion cash and investments with no long-term debt.
- SBC expenses are tax deductible, so less cash goes to Uncle Sam.
Many companies institute stock repurchase plans later on to offset the dilution. The last nugget of great news for Palantir investors is that SBC fell to 22% of sales in the first quarter, so dilution will probably slow down from here.
Although the stock is on a tear this year, it is still 60% off its 2021 high. It isn't cheap at 16 times sales, but the valuation is much lower than that of fellow growing data company Snowflake at 25.
Palantir stock has loads of potential to reward long-term investors and is a terrific play on AI; however, dollar-cost averaging is crucial considering the stock's valuation and recent explosive growth.
