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Palantir 2024: Stability After Insane Rally

Updated: Mar 7

Palantir stock has performed amazingly since my first post about them and a lot of significant events have occurred since then. Now, it finds itself at the crossroads of innovation, global affairs, and investor sentiment. Entering 2024, I anticipate a compelling but rocky journey for Palantir post another amazing run in Feb 2024, which is shaped by global tensions, growing institutional support, and stock evaluation.


Global Tensions and Military Contract


Global tension
Global tension

Amid escalating geopolitical tensions worldwide, Palantir is positioned at the forefront of a shifting landscape. Beyond the Russia-Ukraine conflict, the Middle East and the China-Taiwan front are witnessing heightened discord. Reports hinting at Sweden joining the Ukraine-Russia war suggest an imminent surge in military contracts. Palantir, with its defense-oriented platforms like Palantir Gotham, stands to play a crucial role in supporting nations' decision-making processes during times of increased military activity. This has been proven by the fact that Palantir is being deployed in both Ukraine and Israel conflicts.


The intensification of global tensions brings forth a heightened need for robust cybersecurity measures. In fact, recently, JPMorgan disclosed a significant rise in cyber attacks against the biggest bank in USA. As nations and its associate companies brace for potential increasing cyber threats, Palantir, with its expertise in data analytics and security compliance from its partnership with governments, could see a surge in demand, as well as attack vectors, for its platforms to bolster national cybersecurity strategies. Hence, a partnership with a cyber security expert would be beneficial. At the moment, cloud cyber security companies like Crowdstrike and Palo Alto are the leaders in implementing AI into cyber security. Since I hold a significant amount of Crowdstrike in relative to my portfolio, I would be more than happy to see a partnership between the two.


Exploding Enterprise Adaption


During the Q4 2023 earnings call in Feb 2024, Palantir CEO Alex Karp made striking comments about the company's unprecedented demand, stating, "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.". This reflects the company's struggle to cope with the overwhelming interest in its services, both as employees and clients, as Karp mentioned, "we are being bombarded by people who want to work at this company, bombarded.". The CEO's acknowledgment of the "crazy demand" and the need to "rebuild the company to adapt" underscores the significant challenges posed by Palantir's current situation.


Furthermore, Karp emphasized a shift in focus towards the US market, suggesting that there is "don't think it's outside the US is the case.". This strategic decision could be attributed to high privacy regulation concerns in the EU, which have often posed obstacles for tech companies to adapt high privacy risk technologies like AI and ML models. Karp's comments indicate a deliberate effort to realign the company's operations with the market dynamics, as he stated, "we are razor, we are white-hot in recruiting. We're 20-year company with the strongest recruiting I've ever seen from a company that's Silicon Valley.". This highlights Palantir's commitment to addressing the evolving demands of the industry and its determination to capitalize on the opportunities in the US market.


In light of Karp's remarks, it is evident that Palantir is navigating a period of exceptional growth and transformation, mainly inside the US. The CEO's candid acknowledgment of the challenges posed by the surging demand and his emphasis on rebuilding the company's capabilities underscore the scale of the adjustments required to accommodate the unprecedented interest in Palantir's offerings. Moreover, the company's strategic shift towards focusing on the US market, coupled with Karp's insights into the limited AI appetite in the EU from Palantir previous working experience with EU governments, provides valuable insights into Palantir's efficient market positioning and its efforts to align optimally with the prevailing business landscape.


Institutional Love and Competitors


Institutional investors are expressing growing enthusiasm for Palantir, elevating the company's visibility in mainstream media. Figures like Dan Ives drawing parallels between Palantir and the "Messi" of the AI world underscore the heightened attention. As 2024 unfolds, the board of directors' optimistic projections during Q4 2023 financial conferences hint at a promising year ahead, with the majority of commercial contracts expected to materialize after successful boot-camps. Furthermore, the company became bolder with its marketing by daring to compete with clients' choice of self-build AI for 8 months with their 8-hours solution, as quoted by Palantir CEO.


Healthcare Technology
Healthcare Technology

Beyond defense applications, Palantir's technology might find new frontiers, particularly in healthcare. With the healthcare sector increasingly embracing AI for diagnostics, drug discovery, and patient care, Palantir's platforms could be integral in streamlining data analytics for medical research institutions and pharmaceutical companies. In this domain, Palantir is competing with the giants like Google and Microsoft. For instance, Microsoft has announced new data and artificial intelligence offerings in healthcare, such as generative AI models meant to help ameliorate administrative burden on clinicians. On the other hand, Google has developed Med-PaLM, a generative AI technology that utilizes Google's LLMs to answer medical questions.


Stock Evaluation and Growth Expectations

#Full disclosure: I hold some amount of Palantir shares at the time of this writing. Please do your own analyst before making any decisions.

Following a remarkable 2023 that witnessed a staggering 100% rally and an astonishing 30% rise in Feb 06 2024, Palantir's stock currently breaking the 20$ per share. Analysts now expecting an average of 20% revenue growth and 60% EPS growth rate in the next 3 years. With a net margin grew to 15% in Q4 2023 from 6.93% Q3 2023, a forward PE of 83, and a seemingly insane PEG ratio of 1.38, caution is warranted. Although Palantir CEO and the management were very optimistic in the earning call, the AI hype of 2023 might not be sustainable since the economic landscape has shifted in an election year. Businesses, once in a rush to adopt AI, are now adopting a more measured approach.


The evolving regulatory landscape could also impact Palantir's future, as governments worldwide may grapple with the ethical implications of AI and data analytics more cautiously like the EU. It also came to mind that we have a US Presidential election this year, which undoubtedly impact the next 4 years of regulation landscape for AI. This may require Palantir to navigate evolving regulations, potentially influencing its market access and operational strategies. Additionally, it is not clear to moat-finding investors what sets Palantir apart, as they seem to rely on open models like XGBoost, self-built NN, or Transformers for their LLM, raising questions about the long-term competitiveness of their AI models.


Neural Network Illustration
Neural Network Illustration

Various forecasts from analysts for Palantir paint a mixed picture, with some predicting a significant increase in the coming years, while others suggest a more modest growth trajectory. As similar to my previous analysts, I will clearly draw 3 scenarios for the next 3 years of bear, neutral and bullish. I will also assign a probability number for each case based on the likelihood of associated factors to materialize. Since Palantir is not a giant in relative to other competitors like Google or Microsoft, and in a no-where-near monopoly or duopoly, the fair PEG ratio for me is around 1.3-1.6, depending on various factors.


Bear Case

In the bear case scenario for Palantir Technologies, I anticipate a 15% revenue growth coupled with a 50% EPS growth rate. This projection is primarily attributed to the heightened regulatory scrutiny over AI technologies, which may hinder Palantir's growth prospects. Moreover, there's a concern that Palantir may struggle to convert customers from the enticing narrative presented during earnings calls, particularly regarding the efficacy of its boot-camp programs. The probability of this bearish scenario unfolding is estimated at 12%. While the regulatory constraints on AI are less likely given the prevailing trend favoring disruptive technologies in the United States (for instance, it takes until the Cambridge Analytica incident that really changed US stand on privacy regulation), the challenges in customer conversion pose a more immediate risk due to Palantir's high pricing and unclear long-term competitive advantages.


At a likelihood of 12%, this bear case would entail Palantir trading at a PEG ratio of 1.66, which is slightly high, particularly after a recent 30% stock price surge. Accordingly, the fair price target for Palantir in 2024 under this scenario is assessed at $16.45 per share at 1.3 PEG or 21$/share at 1.6 PEG. This would suggest that Palantir already fairly value after this 30% run and all the growth is priced in fully for 2024. However, investors should remain vigilant regarding Palantir's ability to navigate regulatory landscapes and effectively translate its technological prowess into tangible business outcomes to mitigate the impact of these potential headwinds on the company's performance.


Neutral Case

In the neutral case scenario, Palantir Technologies is expected to achieve a 23% revenue growth accompanied by a robust 56% EPS growth. This forecast is predicated on the premise that nations outside the United States will adjust their stance on AI regulation to foster competitiveness against American counterparts. With a probability of occurrence estimated at 73%, driven partly by the prolonged economic downturn and higher inflation rates experienced by the European Union, this scenario appears relatively plausible. Under this circumstance, Palantir would trade at a current PEG ratio of 1.48, considering its role as a frontrunner in AI application beyond academic realms.


Based on the neutral case analysis, the fair price value for Palantir is estimated at $18.45 per share and $22.702 per share, reflecting a PEG ratio of 1.3 and 1.6 respectively. This valuation underscores the company's position as a leader in AI deployment outside traditional research domains. Again, this would suggest that Palantir already fairly value after this 30% run and all the growth is priced in fully for 2024. However, investors should monitor geopolitical developments and regulatory shifts to gauge potential risks to Palantir's growth trajectory and adjust their investment strategies accordingly. Now, I understand that my EPS growth rate is slightly lower than analysts' 60%. That is mainly due to my skepticism on Palantir conversion rate from their boot-camp proves to be longer and more difficult than my expectation based on Palantir earning conference calls.


Bullish Case

In the bullish case scenario for Palantir Technologies, we envisage a robust 28% revenue growth coupled with a staggering 70% EPS growth. This optimistic outlook is predicated on the factors driving the neutral case scenario, supplemented by Palantir's strategic move to disclose its AI competitiveness through academic papers, aimed at appeasing skeptical investors. However, the probability of this scenario materializing stands at a mere 15%, largely due to Palantir's historical reluctance to publish papers showcasing its AI capabilities compared to leading models like PaLM 2 or GPT-4. Nevertheless, there remains a possibility that Palantir's proficiency in applying machine learning models in real-world scenarios surpasses that of its competitors, as evidenced by its successful military contracts and the CEO's reference to expedited marketing strategies.


In this bullish scenario, Palantir would command a PEG ratio of 1.6, indicating a rational valuation given its projected growth trajectory. Consequently, the full-year 2024 price target for Palantir under this scenario is estimated at $28.34 per share. While the likelihood of this bullish outcome is relatively low, investors should remain attuned to any developments suggesting Palantir's enhanced competitive positioning and its ability to effectively capitalize on emerging opportunities in the AI landscape. It's imperative due to the fact that no clear winners have emerged for this relatively new industry.


Conclusion


Palantir embarks on 2024 amidst a complex tapestry of global challenges, institutional favor, and nuanced stock evaluation. The interplay of these factors will undoubtedly shape the company's trajectory, offering both opportunities and challenges as it continues to navigate the ever-evolving tech landscape.

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