Palantir Technologies Inc. (NYSE:PLTR) just reported quarterly earnings. It shows a continuation of a remarkable rebound in its growth rate, especially in the U.S. commercial sector, driven significantly by its AIP (Artificial Intelligence Platform). In my previous article on Palantir, I highlighted the importance of its BootCamp go-to-market strategy. Potentially, these sales initiatives, which seem to jive really well with customers, are the scaling solution Palantir has been looking for.
It is great that Palantir’s revenue growth rate is accelerating again, and it is fantastic that margins are widening. The fact there is an apparent, identifiable change in operations that appears to drive the growth rebound greatly increases my confidence this could be a sustainable trend.
In addition, it increasingly appears the company greatly benefits from the evolution of large language models, or LLMs, and the urgency that now exists within companies as well as government to be able to utilize AI-driven solutions. The company achieved a 20% year-over-year growth, with $608 million in revenue for the fourth quarter.
The AIP boot camps have exceeded my expectations. On the previous Q3 earnings call, they were on track to do 140 boot camps through November (likely customers were getting these in before the holidays). It turned out they have now done a total of 560 boot camps with 465 organizations total. That’s in two quarters. Last time, I examined revenue growth and margin development. Both continue to be expanding.
The bootcamp sales method also makes it easier (more profitable) to sell to lower-value customers. As a result, the year-over-year commercial customer count is up 44%. Government revenue growth is also important, but customer count is a little less so. There are only so many allied governmental organizations. In the Q&A portion of the call, there was a remarkable exchange between Palantir management and a well-known, widely followed tech analyst (I expect a positive note coming) (emphasis added):
Thank you. So, I think, inconceivable the right word in terms of everything that you produced this quarter. My question would be, are you starting to actually see an acceleration in terms of AIP customer engagement, not even just from Q4, but even starting 2024?
Yeah. I mean the answer is yes, absolutely. And I think we’re still very early, obviously, with AIP and the rollout and very early in the market. But as far as what we’re seeing from customers you see — I mean just see like kind of Q3 to Q4 results and then what we’re seeing in the conversations we’re having with customers, the way that it’s being adopted by the business, as Alex talked about, in the conversations we’re having with customers, we’re seeing that acceleration, and we expect that to continue.
CEO Karp can be a bit hyperbolic at times, but I think what he added is worth highlighting (emphasis added):
Also, just like we do these AIP conferences, I think we invited you and your team, we can’t do enough of them. We’re telling — we’re limiting the number of people who can come. It’s like a rock concert. It’s like, yeah, yeah, if you know somebody, we can get you backstage. By the way, for those of you who are evaluating our company, we are going to invite all of you to our boot camps. Please use as you did, but like take a look at the software. It’s like we are not arguing in the abstract or in a PowerPoint or according to what you may have learned at business school that is better, we are arguing that it is better. And there’s no other way to show that, but to do it.
But to your question, yeah, like, we’re already overfilled for our AIP boot camp. And it’s just we don’t know how to deal actually with this demand. And so, we’re rebuilding the company. And we have a lot of employees in Germany and France. I’m telling them it’s time to pack up and come to America. I’m telling our hiring, we are hiring here. We are having, as I mentioned, a bonanza of people wanting to work here because people are quite frankly tired of working for people who seemingly only have an opinion when it doesn’t matter and with products that may not work. We’re looking at — I’m getting personally involved in the recruiting again to get more people, but exactly the right people, and we’re going to scale against the demand. But it’s a real thing.
Europe is a bit slow figuring out regulations around AI and how they want things to look. For example, Microsoft Corporation’s (MSFT) Copilot isn’t available in Europe. On the one hand, it is slightly disappointing Karp intends to move people from Europe to the U.S. because it isn’t a promising sign of non-U.S. growth (which is severely lagging) picking up anytime soon. On the other hand, the U.S. growth rate is around 70% year-over-year, and if this continues for a few quarters, it is going to start accelerating the revenue growth rate of the entire company.
Seeking Alpha produced this useful set of visuals on PLTR earnings:
The commercial revenue is growing much faster than the government segment and is now approaching the governmental revenue in absolute terms. As it overtakes, the higher growth rate is increasingly driving the total growth rate.
If we segment a bit further and divide commercial revenue into U.S. and non-U.S., it reveals something interesting. Commercial is now $284 million in total. U.S. commercial is at only $131 million, and the main beneficiary of the new boot camp sales process.
Aggregate revenue growth was 20% year-over-year. Government revenue increased 10% year-over-year (meaning the largest slice of revenue is a drag for now). Commercial grew 32% year-over-year (which ultimately should dwarf government revenue). Within the commercial segments, it is the U.S. segment that’s exploding on this boot camp initiative and growing at an astounding 70% year-over-year.
That’s with Karp complaining they can’t fulfill demand and pulling people from Europe (potentially further throttling short-term sales there). This is a great sign that growth is likely sustainably strong in the near term. It also increases my confidence margins are likely to continue to expand in the short to medium term.
Last quarter, I looked into gross margins and these have continued to develop favorably as well:
The last thing I want to call out is Palantir’s FedStart program, which was briefly discussed on the call. FedStart is a platform that helps startups sell their Software as a Service, or SaaS, solutions to the U.S. government. It helps with the challenge of getting the necessary security accreditations. I view this as an app store for the U.S. Army. This isn’t going to produce massive revenue growth in the short term, but if it turns out there’s a viable app-store model possible, it can significantly influence Palantir’s valuation.
These industry-focused platform models are somewhat niche but not without value. Think about companies like Autodesk, Inc. (ADSK), Unity Software Inc. (U), and Unreal Engine. It has been a game changer for Apple’s valuation to derive revenue from 3rd party developed software and have it delivered within its OS platform. Back in 2016, I wrote about Apple Inc.’s (AAPL) budding services segment (i.e., App Store): “Its contribution is modest at this time, but it is a promising component that should not be overlooked.”
It is hard to deny that Palantir Technologies Inc.’s valuation remains demanding. It trades on the higher end even within a group that gets awarded rich multiples compared to the market. The company’s unique business model, which I expect to be characterized by super-high customer retention, drives some of that. Otherwise, a lot depends on the continued success of the new sales method.
However, if you dig into the growth rate per segment, the valuation is easier to understand. Admittedly, I haven’t done similar segmentation for peers, but I do believe something changed with the rollout and widespread attention for LLM’s and Palantir’s boot camps. Contrary to popular belief, the Palantir Technologies Inc. share price is reflecting fundamental changes, and I see it appreciating towards $25 in the short to medium term as long as the Bootcamp strategy keeps working.
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