Summary
Palantir has steady and substantial revenue growth.
Palantir has high gross margins.
Palantir has a history of losses.
Palantir is significantly diluting shareholders.
In this article, I combine all of these factors to come up with a valuation framework for the company.
Michael Vi/iStock Editorial via Getty Images Palantir ( PLTR ) is a great example of how difficult it is to value high-growth companies. PLTR is growing revenues 20-30% annually and has appealing gross margins (~70%). The company also has yet to generate net income and is increasing its share count by 10-15% annually. Extreme bears point to the long history of net losses and accumulated deficits and say that the company is worthless. Extreme bulls argue that the high revenue growth rate means the past doesn’t matter and that traditional valuations shouldn’t be applied to PLTR. I think the answer lies somewhere in between these two viewpoints. In my last article on the company ( here ), I looked at some valuation scenarios using the FAANGM companies as a rough benchmark. In this article I will present an updated valuation model takes shareholder dilution into account and I will use the model to walk through a few valuation scenarios. Housekeeping Notes
This article is not a deep dive into PLTR’s history and business model; there are plenty of other great articles on Seeking Alpha that provide that information, and my previous piece already covered the most important points. My goal for this article is to walk through a set of assumptions and estimates and use them to provide a framework to value PLTR. Details of PLTR’s business model will factor into this discussion, but they are not the main focus of this piece.
I also want to provide the disclaimer that my estimates are precisely that: estimates. Small changes in estimates have a large impact on the final valuation, and I acknowledge that this makes valuing growth companies difficult. I think the estimates and assumptions made in this article are reasonable, but if you disagree with one or more of them please feel free to post a comment with the estimates you would use instead of mine. I’m happy to run some alternative scenarios through the model and discuss the outcomes. Estimates And Assumptions
My updated model relies on five core estimates: revenue growth rate, net margin, earnings multiple, shareholder dilution rate, and investment time horizon. Revenue Growth Rate
Management has guided 30% annual revenue growth or more through at least 2025. The company was able to grow revenue by 25% in 2019, 47% in 2020, and is on track for 45% revenue growth in 2021, so this seems like a fair estimate to me. I am willing to accept a 30% estimated annual growth rate over the next four years. PLTR is expanding their non-governmental product offerings and thus gaining exposure to new markets and customers. PLTR’s products and services aren’t easily compared to competing offerings, so PLTR has room to raise prices if their customers are generally satisfied. An expanding customer base and the ability to raise prices both support sustained revenue growth.
In my previous article on PLTR, I noted that revenue growth rates tend to slow as a company matures, even for high-growth tech companies. For example, the average FAANGM company grew revenues by 45% annually during its first ten years as a public company; that average drops to 24% if you look at trailing 10-year revenue growth. 24% is still exceptional for a large company, but it demonstrates that revenue growth is likely to slow at some point as a company gets larger. In my modeling, I estimate that PLTR’s annual revenue growth will drop to the FAANGM average of 24% after 2025. Net Margin
To date, PLTR has not generated positive net income on a GAAP basis. I expect that to change as PLTR continues to grow revenue and maintains its high gross margins. I don’t expect PLTR to show positive net income in 2022, but it is a real possibility for 2023 and beyond. Management has stated that they intend to keep investing heavily into research and development and the company will need to continue to add headcount to support revenue growth. That being said, Q3 of 2021 showed a drop in operating expenses compared to previous quarters while revenue continued to grow: ( Source )
Management cites “adjusted” operating margins on their conference calls that exclude stock-based compensation, and these adjusted margins are in the 30% range. I don’t […]
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