Palantir’s value tied to ‘60% of their revenue coming from government contracts’: Analyst
Citi Research Director and Senior Equity Research Analyst Tyler Radke joins Yahoo Finance Live share his analysis on Palantir.
Video Transcript
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- Palantir shares surging today, up more than 20% after reporting better than expected fiscal fourth quarter earnings, the company saying it's on track for its first profitable year ever. But our next guest is not so convinced. Let's bring in Tyler Radke, Citi Senior Equity Research Analyst and Co-Head of US Software. Tyler, you're not convinced here. Why not?
TYLER RADKE: Yeah, good afternoon. Thanks for having me. So clearly, as you pointed out, the stock is up a lot today. I think this was still a challenging quarter for Palantir. Yes, to your point, there are a lot of headlines focusing on their first quarter of gap profitability. But ultimately, this is a growth stock. This trades at one of the highest revenue multiples in our coverage.
This is a company that was guiding to 30% long term growth only a few short quarters ago and is now projected to grow half of that over the next coming year. And if you really look at the profitability, the only reason they got to be gap profitable in the quarter was because of some accounting treatments as it related to one of their Japan joint ventures where they recorded a gain on. So if you ax that out, it actually wasn't a profitable quarter. And for the full year, we think they'll be barely profitable on a gap basis and still a pretty expensive stock, given the valuation multiple.
- Tyler some of the gains today are being attributed to comments that we heard from CEO Alex Carp on the earnings call. He was talking about an acquisition, saying, quote, "I think there's going to be a lot of interest in us in buying our software and potentially in buying us." As someone who covers the stock, what do you make of those comments and the fact maybe there could be a potential sale on the table?
TYLER RADKE: Yeah, it was interesting comments, to your point. I think it's hard for me as somebody that looks at the software sector holistically who the logical buyers are. Palantir, this is a big company. We're talking multiple billions of dollars of revenue and a high valuation. And so we'd be looking at a $20 billion plus check to write. There's only a handful of software companies that could afford that.
I also think you have to think about Palantir and their value in being an independent party. They have 60% of their revenue tied to government contracts. And I think the governments value that independence. And so for this to fit under a large cap tech vendor, there's risks around losing talent, losing some of those contracts. It's perhaps a possibility that a large defense company could have some interest. But I think from a technology perspective, it's really hard for us to see who would fit the bill to acquire this, just given the risks involved.
- Yeah, seemed eager to float that, didn't Alex Carp? Also said something interesting, I think for the first time people have seen the impact of digitization of warfare and Palantir's central role in the world. What do you make of that comment? And just the rise in shares, what are investors missing?
TYLER RADKE: Yeah. So look, I think Palantir has a very strong value proposition with the US government, the armed forces. I mean, there's no question they're delivering a lot of value on the front lines. And it's something we really respect about what is a good company. I think our issue is just more of the valuation ascribed to that. You look at the way that defense contractors are valued, they're on a multiple of earnings, a multiple of EBITDA.
We talked about Palantir's profitable quarter. It was $0.01 of gap earnings. So clearly, the stock is being valued on a much higher forward projection. I think overall, look, this is a company that we think can continue to have a lot of success in the government. But I think those growth rates are going to be at a much more modest growth rates than investors are expecting.
And to answer your question around the stock reaction today, it's been an interesting start to the year for the software sector. Many of the names that heavily underperformed last year are up 30%, 40% year to date in only a month and a half. It's a squeezy tape out there, especially with optimism around rates coming down. So we think the M&A news and just that this was a stock that was heavily shorted is driving some short squeeze on the shares today.
- So Tyler, then is it fair to say that you expect revenue sales here to remain volatile over the coming quarters, given some of the challenges that you have laid out, given the fact that the economic backdrop right now has certainly been uncertain at most?
TYLER RADKE: Yeah. And that's the thing we're most concerned about. I think this was the sixth quarter in a row where we had to cut our numbers and kind of lower our forward projections. And so I don't really see any signs of that improving. Again, if you look at the quarter from a bookings perspective, bookings were down 70% to 80%. Even if you back out the SPAC related contracts they were still down. Billings only grew 7%.
So all these leading indicators that you typically evaluate to assess where revenue will grow over the next 12 months really looked concerning and more concerning than the last quarter. So we do think it's going to be volatile. And ultimately, we're concerned that just the growth in margin expansion you see at this company over the next year could disappoint.
- Fresh take there from Tyler Radke. Appreciate that.
