Transcription
Something big is happening at Palantir. They're one of the best AI companies on Earth because they're building some of the most powerful AI platforms on Earth, from Gotham and Foundry to Apollo and AIP. But with Palantir's stock jumping up by 20% after one of their best earnings calls yet, there's really only one question left to ask: Is this the top for Palantir stock, or are their best days still to come? Your time is valuable, so let's get right into it.
First things first, I'm not here to waste your time, so here's everything I'm going to cover in this video. I'll walk you through Palantir's awesome earnings results and what I think are the most important metrics to watch. I'll talk about my thoughts on Palantir's position in the AI market now and in the long term, and I'll update where Palantir is on my list of stocks to get rich without getting lucky, which I think has done pretty well even after this most recent market downturn.
Anyway, let's start with Palantir earnings. Palantir posted record revenues of $678 million for the quarter, which is up 7% quarter over quarter and 27% year over year. Even better, their U.S. commercial customer count grew 133% since last quarter and a massive 83% since this time last year. In fact, their U.S. commercial customer count grew by 9x over the last 3 years. Palantir closed 123 U.S. commercial deals this quarter, which is roughly twice as many as they were closing a year ago. The combined value of those deals is up 152% from last year, which means Palantir is locking in more and more customers, each with bigger and bigger contracts on average.
As a result of all that growth, Palantir's U.S. commercial revenue grew by 55% year over year. That's a massive difference from the 33% commercial revenue growth that they reported less than a year ago. Government revenue grew a lot as well, going up by 24% for U.S. contracts and 23% overall. Those numbers really excite me for two key reasons:
1. It shows that Palantir doesn't need to sacrifice their government business to accelerate growth on the commercial side, which is something that was worrying investors and analysts two quarters ago when they reported just 6% revenue growth for their U.S. government business.
2. For the first time in Palantir history, the trailing 12-month revenues from U.S. government surpassed a billion run rate, which is a clear sign that foreign and domestic governments want to work with Palantir more and more as the geopolitical tensions flare in parts of Asia, Europe, and the Middle East — which isn't something you see very often for software companies, let alone pure-play AI companies.
Because Palantir is excellent at managing their balance sheet and keeping operating expenses relatively steady, their operating margins explode when their commercial and government businesses are both doing well. As a result, Palantir's GAAP and adjusted operating margins are at 16% and 37%, respectively. Not bad considering Palantir achieved operating profitability less than 2 years ago. This growth in revenue and profitability drove a 7-point increase in Palantir's already high Rule of 40 score, from 57 in the first quarter of this year to 64 after Q2.
If you don't know what the Rule of 40 is, don't worry, I've got you covered. Palantir really only started highlighting this metric last quarter, but I think it's an important one because price-to-earnings ratios can be very misleading for companies with high earnings growth. The Rule of 40 says that even if a SaaS company has low earnings today, it could still be a good investment if its revenue growth and profit margins add up to 40 or more.
Palantir's Rule of 40 score is 64, since the revenues grew by 27% and their adjusted operating margin is currently 37%. So the obvious next question is: How good is a score of 64? Well, instead of guessing, let's compare Palantir's score to other SaaS companies.
Splunk, which got acquired by Cisco for $28 billion earlier this year, has a score of 53. Adobe, with its massive portfolio of media editing and e-commerce tools, has a score of 50. CrowdStrike and Salesforce are both massive companies that have scores just below 40 but for opposite reasons. Before the whole global IT outage happened, CrowdStrike reported 33% revenue growth and 4.6% margins while Salesforce reported 11% revenue growth but 20.6% margins.
It's worth mentioning that as a company's score goes up, each point is harder to achieve than the last, since that company would have to sustain very high growth rates or very high operating margins as their market matures and competition increases over time. That's why most companies either have high revenue growth or high margins, but usually not both. So, Palantir's score of 64, coming from 27% revenue growth and 37% operating margins, means they're absolutely crushing it.
It's also worth pointing out that Palantir's revenue growth has been accelerating for the last four quarters, growing by 17%, 20%, 21%, and now 27% year over year. Combine that with their expanding operating margins, and they could have one of the highest Rule of 40 scores for years to come.
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All right, Palantir didn't just beat expectations on revenue and earnings per share; they also raised their FYE revenue guidance from $2.68 billion to $2.74 billion — a 2.2% increase may not sound like much, but that brings Palantir's revenue guidance above analyst estimates. They also raised their guidance for U.S. commercial revenues, projecting a year-over-year growth rate of at least 47%, as well as raising their expected adjusted operating income to $97 million, which is a massive increase from their estimate from last quarter of $874 million.
Speaking of massive increases, their earnings per share grew by a whopping 500% year over year or 80% on an adjusted basis. Palantir performing above already aggressive expectations is why Palantir stock rocketed up once they announced their earnings. Heck, even their net dollar retention rate, which measures how much more money existing customers spend with them per year, increased from 111% to 114%. So, Palantir really is firing on all cylinders.
Usually, whenever I cover Palantir, I take some time to explain what they do and what makes their software so special. But I've made almost 20 videos on them at this point, so I thought this time I'd share a different kind of insight, which is that Palantir has a pretty special place in the AI market right now.
Let me show you what I mean: Technology always progresses in cycles, and each cycle builds on everything that came before it. In the 1970s, we had mainframe computers — and by "we," I really mean government agencies, large enterprises, and institutions. But by the late 2000s, there was at least one computer in every home and every office. By 2019, everyone had computers in their pockets. If you include tablets, laptops, desktops, and data center machines, there are more computers on Earth today than there are people. But that didn't happen overnight.
In fact, the mobile internet evolved in three specific phases, and Morgan Stanley research expects the AI era to follow the same trend, which is where Palantir comes in. The rise of the mobile internet happened over a long time. This chart starts in 2010, but the first iPhone came out in 2007, and Apple's App Store launched in 2008. It took 3 years for the iPhone to reach mass market adoption, disrupt BlackBerry, and really usher in the era of mobile computing.
The same thing is happening today. We've all heard of generative AI by now, but it could still be a few years before we're all using it in our day-to-day lives. Likewise, this chart ends in 2016, but 5G didn't even start rolling out until 2018, and tons of new mobile-first apps and services launched during the pandemic.
While companies that build high-margin software and services tend to perform the best in the long run, they're the last part of the value chain to rise. That's because they need an established infrastructure to run on top of, like data centers and edge devices. Before that infrastructure can be built, semiconductor companies need to build the chips that power it.
So the rise of the mobile internet actually took anywhere from 8 to 15 years, depending on where we consider the start and the end. Either way, ChatGPT was released less than 2 years ago, so we're still in the very early innings of the AI era. That's why many of my top stocks to get rich without getting lucky are chip makers like Nvidia and AMD, cloud infrastructure providers like Microsoft with Azure, Amazon with AWS, and Google with Google Cloud, and cloud security companies like Fortinet and Palo Alto Networks.
They really belong to the first two phases of this chart. The special thing about Palantir is that they're one of the few companies in the third phase of this chart, since they're a pure-play software company that focuses on bringing AI to enterprises and government agencies. In Alex Karp's most recent letter to shareholders, he noted the unrelenting wave of demand from consumers for production-ready AI systems, and Palantir is one of only a few companies that can meet that demand right now.
There are two more important metrics that I'm watching to see just how Palantir is meeting that demand. The first is the number of organizations that are attending AIP boot camps, which are hands-on working sessions where participants can work directly with Palantir's engineers to build real solutions using real company data in less than a week. Subject matter experts and decision-makers can plug in their own company's data, even if it's sensitive, and use AIP to build their own AI tools and workflows. They leave these boot camps with real AI use cases that are close to production-ready and with enough hands-on experience to actually implement them.
On top of that, Palantir's partners can run their own boot camps, which effectively makes them an extension of Palantir's sales team, helping AIP adoption compound even faster. That's why it's important to watch the number of organizations that attend these boot camps, not just Palantir's overall customer count.
The other important metric is Palantir's time to value. Back when I was a researcher at MIT, we got to demo a lot of awesome software, but we almost always came to the same conclusion: Switching to something new was way too costly because it would take a long time to learn it, implement it, and generate real value for our program sponsors, which usually had tight timelines and budget requirements of their own. We're talking months or even years between purchasing a piece of software and using it to its full potential, all while dropping whatever we were already using at full speed.
But Palantir can get past the gatekeepers at large enterprises and government agencies because their platforms are designed to generate a lot of data-driven insights in a matter of days. In their latest earnings report, Palantir highlighted three case studies where commercial enterprises attended AIP boot camps and signed deals in a matter of weeks. Even more impressive is how different these three enterprises are: a large insurance firm, a global life sciences company, and a convenience store chain.
Palantir's platforms are constantly expanding their total addressable market to new verticals and adding new out-of-the-box capabilities to each.
So far, I’ve walked you through Palantir's awesome earnings results and highlighted what I think are the most important metrics to watch, including their operating margins, their Rule of 40 score, the number of organizations attending AIP boot camps, and their overall time to value, which determines if an organization is willing to switch to their platforms in the first place.
I also shared my thoughts on Palantir's position in the AI market as one of the very few software companies worth investing in this early in the generative AI era, which should earn them a position in any long-term tech stock portfolio. Now that we've gone through all that context, let me show you where I'm putting Palantir on my list of stocks to get rich without getting lucky. If you feel I've earned it, consider hitting the like button and subscribing to the channel. That really helps me out and lets me know to put out more content like this. Thanks!
Now, with that out of the way, let me show you where Palantir currently sits on my stock list. I still think that Microsoft is the king when it comes to implementing generative AI into enterprise software, especially with Microsoft Azure AI, their deep partnership with OpenAI, and their acquisition of the Inflection AI team earlier this year. They're well-positioned for all three phases of the AI era that we discussed earlier, so it would take a lot to knock Microsoft out as the top company on my list.
Nvidia is a very close second because they're the current king of AI hardware, and I don't see that changing anytime soon. They're so far ahead and moving so much faster than every other chip maker. Nvidia reports earnings in a couple of weeks, and if they over-deliver like they have been, they're the only company that might knock Microsoft out of my number one spot.
On the other hand, when I made this list back in December of 2023, Palantir started in the number nine spot because I had concerns about their overall go-to-market strategy. Those concerns are long gone, and Palantir is proving that AIP seriously lowers the time it takes to get AI solutions up and running across a massive total addressable market — from heavy industries to national security, finance, and life sciences.
So I'm moving Palantir stock up one more spot on my list, just above Google. That's a huge move considering how confident I am in Google Cloud, Google Chrome, the Android ecosystem, and all the services that they've built on top of them, and how far up the list Palantir has already moved over the last 8 months.
But this is why it's so important to understand the science behind the stocks. If you want to see why I pick these stocks, here's the video where I walk through it step by step. Either way, thanks for watching, and until next time, this is Ticker Symbol U. My name is Alex, reminding you that the best investment you can make is in you.