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Palantir Accelerates Commercial Business in Q3

We think the market doesn't appreciate the growth potential of the company and have raised our fair value estimate.

We are raising our fair value estimate for narrow-moat Palantir Technologies PLTR to $31 per share from $28 after third-quarter results provide us with increased conviction in the company's strong growth prospects, even while amassing scale. Year-over-year sales growth of 36% matched our expectations, while adjusted earnings per share of $0.04 came in slightly higher than we anticipated. Shares fell as much as 10% after Palantir reported results, which we believe is due to government revenue declining 6% sequentially, although against a tough comparison, and the fourth-quarter outlook potentially being conservative. Taking a longer-term view and being upbeat about Palantir’s tailored use case software modules making its software more easily consumable across industries and organization sizes, we believe the negative reaction creates an attractive entry point for investment.

The strong sales growth came from commercial growth accelerating to 37% while government grew 34%, both year over year; commercial was 44% of revenue in the quarter. Palantir’s customer count grew by 34 net new customers to 203, with commercial customers up 46% sequentially. Total remaining deal value grew to $3.6 billion, up 50% year over year, and commercial deal value grew to $2.2 billion, up 101% year over year. While we expect steady government backlog and new contracts to account for more than half of sales for years to come, we believe commercial can become the larger contributor in the long term. We positively view the momentum in commercial and Palantir expanding its use cases through new modules, which we believe serve as hooks to initially land a customer before proliferating Palantir’s use cases across an organization and its ecosystem. This can lead to solid operating margin expansion in the long term. We believe the 30% adjusted operating margin in the quarter was a strong result amid Palantir's ramping up sales and distribution investments to spur lofty growth goals.

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