Palantir Shares Plunge as Government Growth Decelerated
Although we anticipate the company will generate strong, durable growth, we are lowering our fair value estimate.
We are lowering our fair value estimate for narrow-moat Palantir Technologies PLTR to $27 per share from $31. Our decrease is largely due to tempering longer-term expectations for margin expansion, although we still anticipate the company will generate strong, durable growth. We believe the shares are appreciably undervalued for long-term investors. In our view, Palantir's software is mission-critical to some of the world's largest institutions, and the company is making significant strides landing new commercial clients of all sizes with prebuilt modules and consumption-based pricing alleviating up-front cost concerns.
First-quarter results were in line with anticipated revenue growth, while adjusted earnings came in lower due to unrealized losses in marketable securities. The shares were down more than 20% after the report, which we attribute to second-quarter revenue and margin guidance being appreciably lower than our expectations. However, Palantir maintained its goals of at least 30% annual sales growth through 2025 and hitting 27% adjusted operating margin in 2022. We think this implies a strong back half to 2022 thanks to government growth picking back up after the U.S. budget was passed in March.
First-quarter sales growth of 31% year over year came from government growing 16% and commercial expanding 54%. Government sales only grew 1% sequentially, but the company is already seeing second-quarter U.S. government revenue pick up, and geopolitical matters can help drive stronger growth in the second half of 2022. Palantir added 40 customers in the quarter, with 37 net new commercial clients. While the vast majority of Palantir's revenue comes from existing clients, we think the rapid expansion of its commercial base is critical to long-term growth durability. Also, we believe Palantir has a land-and-expand model, whereby it can expand its margin and free cash flow profile after initial up-front investments that lock customers into its ecosystem.