Palantir’s (NYSE:PLTR) shares have rallied in recent weeks as the better-than-expected performance in Q3 and better guidance for Q4 made the market excited about the company’s growth prospects. The company’s shares are now up ~30% since the publication of my latest article on Palantir in late September, and I still believe that the business’s growth story is far from over. Even though Palantir now trades at multiples that are significantly greater in comparison to the average market multiples, there are reasons to believe that the growth opportunities will continue to outweigh the valuation concerns in the following quarters and help the shares keep their momentum. That’s why I’m still holding my long position in the company and have no plans to unwind it anytime soon.
All Eyes On AI
Earlier this month Palantir revealed its Q3 earnings report which showed that the company’s revenues during the period increased by 16.8% Y/Y to $558 million, above the estimates by $2.08 million, while its non-GAAP EPS stood at $0.07, also above the estimates by $0.01. The company has also generated $133 million in cash from operations and ended the quarter with $3.3 billion in cash reserves, which is a major increase from $2.5 billion a year ago.
Such a great performance helped the stock appreciate to the 52-week high levels and there are reasons to believe that the shares could retain their momentum in the future as everything points out to the fact that Palantir’s growth story is far from over.
With the launch of its generative AI platform AIP earlier this year, Palantir was able to generate an impressive interest in the platform and attracted almost 300 major clients who are now using it. As we enter the new age of AI, it appears that Palantir has a major advantage over its peers in the government and commercial sectors.
The AI is already changing the nature of warfare and Palantir is currently learning about how AIP could be efficiently used on the battlefield by deploying it in Ukraine. Back in June, I wrote an article about Palantir’s operations in my home country of Ukraine and noted how the company uses the current war to test its software directly on the battlefield. After that, a few weeks ago Ukraine’s Minister of Digital Transformation revealed that Palantir’s AIP platform is being used as one of the primary generative AI tools to help the government learn about how many mined areas there currently are and how long will it take to demine them. The minister notes that such a task would’ve taken data analysts days and shows on the video that AIP could do it in a few moments. He also states that the system is constantly being improved with the help of new data and more real use cases will be revealed later.
This example shows that AI is indeed changing warfare and Palantir appears to be at the forefront of learning about all the changes to ensure that AIP and its other platforms have an edge against other competitors. That’s why even though the company’s government revenues increased by 12% Y/Y in Q3 to $308 million, there are reasons to believe that the growth will accelerate once the adoption of generative AI tools among government agencies increases over time.
At the same time, a similar thing could also be said about the commercial sector, which is interested in using generative AI tools to better optimize its own operations. The use of generative AI tools has surged in recent months and such a growth has been reflected in Palantir’s financials. In Q3, its commercial revenues increased by 23% Y/Y to $251 million, while its US commercial customer count increased by 37% Y/Y. The company is now on track to conduct AIP Bootcamps for over 140 organizations by the end of this month, as the interest in different AI tools is unlikely to decrease anytime soon.
The Valuation Dilemma
Given all of those growth opportunities, there’s no denying that Palantir’s business is likely to continue to generate aggressive double-digit returns in the following years especially since it appears that it has a moat against others in the generative AI space. The only question at this stage is whether its shares will be able to continue to appreciate further in the next few quarters.
My optimistic DCF model that was published in September showed that Palantir’s fair value is $16.05 per share, which is already below the current market price. However, it’s important to understand that Palantir never truly traded at its fair value, but it didn’t stop its shares from appreciating further as the market backed its growth story and helped to propel the shares higher. As we enter the new of AI, Palantir is looking to become one of the most important companies in the field, which could more than justify its premium valuation at the moment.
If we look at Seeking Alpha’s Quant system, we’ll see that Palantir has a grade of ‘D-‘ for valuation, but on all the other metrics it has a score of ‘B+’ and higher. This indicates that the company’s current valuation is indeed the only main concern when deciding whether to invest in the company. Despite this concern, I believe that the company would be able to keep the momentum going in the following quarters, which could help Palantir’s shares to grow as was the case in the past.
Let’s not forget that the latest increase of revenue guidance for FY23 to between $2.216 – $2.220 billion, above the previous consensus of $2.21 billion, indicates that the company is likely once again generate strong returns in Q4 which could result in another round of stock appreciation as was the case in recent weeks. At the same time, a spike in upward revisions by the street along with a price target of $25 per share by some major firms shows that Palantir is likely to retain its momentum for the next few months at the very least.
That’s why as the AI adoption enters a new stage, I decided to stick with my investment in the company and not unwind Palantir from my portfolio. The upcoming S&P 500 inclusion, the signing of new contracts, and the realization of all the growth opportunities at a limited cost are likely to continue to outweigh the valuation concerns in the following quarters.
The Bottom Line
There are reasons to believe that the growth opportunities will continue to outweigh the valuation and other concerns, which should help Palantir’s shares retain their momentum. That’s the main reason why I decided to continue to hold my long position without any plans to unwind it anytime soon as the growth story appears to be far from over.