From the government contracts down to its valuation, Palantir (NYSE:PLTR) has been a controversial stock, with neither side backing down from their viewpoints. Since its peak in February 2021, shares of PLTR have crashed 64.42% to $16.01 on 1/14/21. Like many growth stocks, PLTR has been a falling knife inflicting wounds in countless portfolios on its way down. During growth's ascent into February 2021, investors saw that enormous returns became addicting, and many investors began to believe that companies with disruptive potential would just keep appreciating. Investing became too easy, and many thought they could consistently outperform the market until they couldn't.
I have said in previous articles that PLTR is one of my highest conviction investments for the decade, and let me emphasize a keyword here, decade. I'm not a short-term investor, I don't day trade, and I don't get caught up in momentum trades. The main aspect many bears overlook when it comes to PLTR is time, and they focus on valuing PLTR the same way they would value Intel (INTC). My time horizon for investing in PLTR has always been 5-10 years out, and I have repeatedly said I don't care about the price in the short term. How many people can actually buy a stock around the bottom and sell it around its peak consistently? I bought my original block of PLTR shares for under $10, paid as much as $28 per share, and added to my position at least 15 times in-between.
As an American, I'm proud to be a shareholder of PLTR as they are elevating our government's and its allies' technological infrastructures. In the short term, PLTR may not be a great investment, but I'm not looking for it to be. I'm placing my capital behind PLTR because I believe it's a Unicorn with exponential growth potential and the possibility of becoming one of the most important software companies in the world. Could shares of PLTR keep declining? Absolutely, so stop gambling and don't invest money you're unwilling to lose. PLTR is a long-term investment, and if you don't have the risk tolerance for investing in individual equities, plow your money into an index fund such as the Vanguard S&P 500 ETF (VOO). I have written about VOO, I'm invested in VOO, and it's done quite well. The investment thesis around PLTR has to do with its current growth metrics, projections, forecast raises, technology platforms they unveiled, and the futuristic industries being built on their platforms. I'm planning to buy the dips, and if I can get more shares at $10, even better, bring it. I don't know if I have ever given a share price prediction for PLTR, so I'm about to give people something to cheer about or leave comments about how ridiculous my prediction is. PLTR will exceed at least $120 per share in 2032, and this will be a 7-10 bagger from here, placing their market cap between $224.7 and $321 billion. I provide mathematical projections and reasoning later in the article so please read that before leaving negative comments that I have lost my mind.
I was wrong about PLTR's chart, and now the chart is signaling PLTR could head lower as a new bottom hasn't been established
Sometimes technical analysis doesn't matter, and stocks fall right through levels of resistance. From May of 2021 through November, PLTR's chart established a pattern of making higher lows and higher highs. During this period, shares of PLTR tried to break out to the upside and retest the $30 level three times, and each dip created a higher low. From May through October, PLTR created a channel where the bottom resistance line wasn't breached. At the end of September, PLTR sold off after making a new high of $28.50, then fell below $24, but shares didn't crash through the trend and curled back up to $26. PLTR was set up to trade within this channel and break out to the upside if they delivered a strong Q3.
Well, we all know what happened to this story. After earnings shares of PLTR, like many other growth companies, just collapsed, the channel that PLTR had established was decimated and the bottom line of resistance was obliterated. There's nothing about PLTR's three-month chart signals that shares have bottomed, and we could see this trend continue. Until some stability is generated, there's no way to tell if we have bottomed, if PLTR retests $15 or if shares continue to trend lower. The chart isn't pretty, and PLTR is now caught in a downward spiral. All the bulls shouldn't be fooled; if PLTR breaks the $15 barrier, $12.50 is a real possibility. A strong earnings call may not be enough to counteract PLTR's downward momentum in the short term. After all, PLTR delivered a strong Q3, and shares have done nothing but declined. I don't have a crystal ball, but based on what's occurred in the Nasdaq and growth stocks in general, there is a real possibility that we see $15 before $20.
Before criticizing PLTR for their Government contract segment, it would be wise to look at the spending trends within the USA and where money is projected to be spent
The Congressional Budget Office has not released their infographic for Fiscal Year 2021, so I'm going to use 2020's for my example. In 2020, the United States Government spent $714 billion on the defense budget, then an additional $914 billion on non-defense, including outlays for health, transportation, and other activities. There's also a section named Other, which $988 billion was allocated to and the capital is allocated to. Since 2008, the defense budget has exceeded $600 billion annually and topped out at $752.29 billion in 2011. In recent years, we have seen the defense budget increase by 5.53% to $682.49 billion in 2018, 7.22% in 2019 to $731.75 billion, then decrease by -2.43% in 2020. From 2010-2019, the United States has spent $6.88 trillion on its defense budget in the last decade.
Whether you agree with the federal budget or how the capital is allocated, PLTR continues to win government contracts that correlate to revenue. In Q3, PLTR signed new deals with the U.S. Department of Health and Human Services, the U.S. Air Force, NIH, the U.S. Department of Veterans Affairs, and more. In Q3, PLTR grew the amount of revenue generated from government contracts by 34% YoY and generated $218 million in Q3 from this business segment.
It's puzzling how individuals disregard PLTR's relationship with the US government. When the United States government continues to award contracts to PLTR, it makes PLTR's software more viable to our allies. PLTR has its hands in every segment of the US military and has expanded throughout the Department of Justice. There's a large opportunity for PLTR to gain additional contracts internationally from our allies in addition to future contracts domestically.
I continue to become more bullish on PLTR in the long term because I follow where the money is being allocated. The U.S. Department of the Treasury published The American Families Plan Tax Compliance Agenda in May of 2021. This agenda specifically outlines that $80 billion in additional resources will be allocated to rebuilding the IRS over the next decade. A portion of these resources will be allocated to leveraging information that financial institutions already collect to shed light on those taxpayers who misreport income derived from opaque categories and overhauling antiquated technology to help IRS leverage 21st-century data analytic tools. When you look through the Federal Procurement Data System, several contracts were signed between PLTR and the IRS, and the SEC (Securities and Exchange Commission). The SEC signed a deal with PLTR on 4/29/21 that has a completion date of 6/18/22 and an ultimate completion date of 6/18/25. This deal is worth $13 million for its action obligation and $32 million for its total contract value. This contract is for an Enterprise Data Analytics Platform. Interestingly enough, the IRS also signed a deal on 4/30/21 with PLTR worth $5.6 million.
On Dec. 2, PLTR won an additional contract from Space Systems Command for $43 million. The contract builds on their previous awards bringing their committed contract value with PLTR to $91.5 million. PLTR also won a second option year with one of their contracts with the U.S. Army. The U.S. Army has greenlit a second option year for the Vantage Program for $116.3 million. The Army Vantage data analytics platform uses Palantir's software for a central operating system to boost readiness and controlled access to army data sources.
When you follow the dots, the US government is becoming more reliant on PLTR, which puts PLTR at the front of the line for new contracts. I have my eyes on the JEDI contract, a $10 billion cloud computing contract through the Department of Defense, a larger customer of PLTR. On 7/6/21, the Department of Defense released a statement canceling the contract award to Microsoft (MSFT), upgraded the contract requirements, and sourced the components through a multi-vendor cloud computing contract. The DoD was explicitly clear that their new initiatives included JADC2 (Joint All-Domain Command and Control) and AI and Data Acceleration (ADA). In an official document from the Congressional Research Service, it states:
"Joint All-Domain Command and Control (JADC2) is the Department of Defense's (DOD's) concept to connect sensors from all of the military services - Air Force, Army, Marine Corps, Navy, and Space Force - into a single network.
Sometimes you need to become a detective and follow the money. The US government allocates trillions to the safety of this country, and there are more contracts up for grabs. PLTR's strong relationship with the government is positive, and PLTR has been increasing its moat for years. There aren't many companies that can compete with PLTR's software, and let's face it, the United States Military Industrial Complex isn't going to disappear. Capital will always be allocated to this budget segment, and PLTR has grown well past a niche software provider. What started out as a secretive black box company has expanded throughout many government segments, and PLTR is winning contracts from everywhere.
Going into Q4 Earnings, Palantir has formed exciting partnerships and executed additional contracts on the commercial client side
PLTR and Hyundai Heavy Industries are forming a joint venture to commercialize big data solutions. PLTR and Hyundai are building a big data platform for Hyundai's core businesses, including shipbuilding and offshore engineering. PLTR will provide software and development personnel while Hyundai brings the affiliate's process expertise and sales to the table. Hyundai also will deploy the PLTR Foundry platform.
PLTR and Dewpoint Therapeutics announced a partnership where Dewpoint will deploy PLTR's Foundry platform to help power Dewpoint's efforts to discover treatments and cures for the most challenging diseases. This multi-year deal showcases PLTR's most comprehensive partnership with a biotech company. Dewpoint will utilize Foundry as the primary platform for its centralized knowledge repository, helping it contextualize its experimental results and prioritize the most viable outcomes. Foundry will also help researchers further their understanding of condensates biology by analyzing lab data and other data sources, including data from the published literature and databases, to identify new compounds and therapeutic approaches.
MERCK Kommanditgesellschaft auf Aktien (OTCPK:MKGAF) is a $93 billion German company that has been collaborating with PLTR since 2017. MKGAF and PLTR have recently have joined forces to provide a collaborative data analytics platform for the semiconductor industry. The platform will offer insights into materials and processes at semiconductor fabrication plants in addition to utilizing AI and big data to address challenges such as semiconductor chip shortages, supply chain transparency, time-to-market, and product quality. This deal is huge because the semiconductor industry continues to grow. The future implications of this data analytics platform could correlate to future contracts with some of the most prominent semiconductor companies and drive large amounts of revenue to the bottom line. Keep in mind that President Joe Biden has outlined a blueprint for the U.S semiconductor industry. Once the White House delivered their 250-page report, the U.S. Senate expressed bipartisan support by passing a bill offering $52 billion to bolster domestic chip manufacturing. PLTR also signed a multi-year agreement with one of my favorite American energy infrastructure companies Kinder Morgan (KMI), which I recently wrote an article on. KMI will deploy Foundry into their storage and operations segment to drive efficiency and safety. KMI will look to optimize its U.S based gas storage operations and leverage Foundry to make data-driven decisions on gas storage, optimization, and maintenance scheduling. This is an incredible deal for PLTR, and it expands their energy contract portfolio as they have been working with BP p.l.c (BP) for years. KMI operates more than 70,000 miles of natural gas pipeline and has 144 terminals. Within KMI's network, they operate over 700 bcf of working storage capacity. The energy infrastructure segment is huge, and I am excited that this could be the first of many large-scale contracts within the industry. By partnering with KMI, PLTR now has the ability to showcase its expertise and possibly win additional contracts from companies like Enterprise Products Partners (EPD), Energy Transfer (ET), or Enbridge (ENB).
Palantir is making strategic investments into young companies and these businesses are being built on PLTR's software
PLTR has invested in 9 companies and is committed to investing in an additional 12 companies. This is one of the most exciting investment elements in PLTR, but you need to look 5-10 years out, maybe even 15 years, with an open mind. Currently, PLTR has an equity position in nine young companies and is committed to taking an equity position in an additional 12. While these positions are all under $50,000 investments, the more important aspect is that these companies are utilizing PLTR's software to build their companies. You have everything from connected vehicles to satellite imagery, robotic exoskeletons, and flying vehicles. This is certainly forward-thinking, and these investments will take years upon years to materialize, but it's a genius move on PLTR's part. PLTR is getting in on the ground floor, cultivating relationships, and their software will help shape tomorrow's industries.
Look back to the 80s, 90s and 2000s. Evolution never stops, and technological advances continue to redefine how society operates. Think about how different life is today than in 2000 and how the rate of change continued to increase. To think that this is where evolution stops is crazy. In 2000, if you had said we would have smartphones connected to smartwatches, and you would be able to hold a meeting with 500 people on a digital platform, chances are you would have been told to stop watching science fiction movies. With the computing power we have today, what do you think the world will be like in 2040? Will gene editing become a reality, will we have flying vehicles, will humans utilize robotics to enhance their output and reduce injury from physical labor, will companies be able to track global shipments through deploying dedicated satellite imagery, will autonomous vehicles become the standard, and will all automobiles become connected vehicles? I can't say yes or no, but I wouldn't bet against evolution and I am positive that 2040 will look nothing like 2022.
Palantir is delivering on financial growth, and based on its current performance, the future looks bright
PLTR has gotten slaughtered since Q3 earnings were released. While nobody wants to see their investment decrease in value, not a single stock has just gone up. Even Berkshire Hathaway (BRK.A) (BRK.B) and Apple (AAPL) have declined in value during periods of time. There isn't a perfect valuation methodology, and you can drive yourself insane trying to understand why the market rewards one set of financials but not another. If you're looking for a short-term trade, go buy Apple, I am willing to bet Apple delivers their best quarter ever in a few weeks and sets the tone for their most profitable year, which could generate a bounce to the upside. If you're looking for an investment into the future that could be a 5-10 bagger and are willing to overlook price volatility over the next several years, PLTR is an outstanding candidate.
In Q3, PLTR added 34 new customers and closed 54 deals worth $1 million or more. PLTR's remaining deal value increased by 50% YoY to $3.6 billion. PLTR is now delivering two of the most important metrics, cash from operations and adjusted free cash flow. PLTR's revenue in Q3 grew by 36% to $392 million, and in the first nine months of 2021, PLTR's revenue increased by 44% to $1.1 billion compared to 2020. In Q3, PLTR's cash from operations improved by $153 million YoY as they generated $101 million. This allowed PLTR to generate $119 million in adjusted free cash flow in Q3, which was a 30% margin, and year to date, PLTR has generated $320 million in adjusted free cash flow. In the first nine months of 2021, PLTR achieved their 2021 full-year projection of generating $300 million in adjusted free cash flow and raised their guidance to $400-plus million for 2021. This is exactly what you want to see from a growth company, revenue increasing and driving cash from operations and free cash flow. As PLTR continues to grow, its increased revenue is driving the bottom line.
In Q3, PLTR added 34 net new customers, and their total customer count increased 20% QoQ. PLTR witnessed its commercial count increase by 46% QoQ on the commercial side. The amount of revenue generated on the commercial side has increased 37% in Q3 YoY and 43% on the government side. There's a lot to celebrate as 33 of the 54 deals closed in Q3 were valued at $5 million or more, and 18 of the 54 deals had a value that exceeded $10 million. PLTR ended Q3 with $3.6 billion in remaining deal value which was up 50% YoY, but the commercial side increased by 101% YoY to $2.2 billion, which is almost two-thirds of their total remaining deal value. The big complaint used to be that PLTR was dependent on government contracts, and now the investment community is seeing true diversification from its revenue sources.
PLTR may not have been rewarded for beating earnings and increasing their 2021 guidance, but the important thing is that they did exactly that. PLTR is projecting that their revenue in Q4 will come in at $418 million with a 22% adjusted operating margin. On the full year, PLTR is projecting that their revenue growth will increase to 40% from their 30% forecast and deliver $1.53 billion in revenue for the 2021 fiscal year. PLTR also is increasing their forecast on the bottom line as well and projecting $400 million in adjusted free cash flow, which is a 33% increase from their $300 million guidance. PLTR is still projecting that it will achieve 30% annual revenue growth over the next four years.
Based on PLTR's past earnings reports, they have gained a reputation for underpromising and overdelivering. PLTR is going to finish 2021 guiding up on revenue and adjusted free cash flow. I have created some projections for fiscal year 2032, and keep in mind these are just projections. I don't have a crystal ball. Currently, in the first nine months of 2021, PLTR has an adjusted free cash flow margin of 29.1% as they have generated $1.1 billion in revenue and $320 million in adjusted free cash flow. On their full-year guidance of $1.52 billion in revenue, their low-end $400 million would put them at a 26.2% adjusted free cash flow margin. If PLTR stays flat and generates $119 million of adjusted free cash flow in Q4, that would put them at $439 million of adjusted free cash flow in 2021 for a margin of 28.75%. My projections are going to assume that PLTR can at least maintain their 30% annual revenue increases past 2025, and I am going to use a 28% adjusted free cash flow margin.
If PLTR can maintain a 30% YoY revenue growth rate and a 28% adjusted free cash flow margin, then in 2032, PLTR would generate $27.37 billion in annual revenue and $7.66 billion in adjusted free cash flow.
If PLTR can maintain a 35% YoY revenue growth rate and a 28% adjusted free cash flow margin, then in 2032, PLTR would generate $41.45 billion in annual revenue and $11.61 billion in adjusted free cash flow.
If PLTR can maintain a 40% YoY revenue growth rate and a 28% adjusted free cash flow margin, then in 2032, PLTR would generate $61.84 billion in annual revenue and $17.31 billion in adjusted free cash flow.
Today, Shopify (SHOP) trades at a 302.33x free cash flow multiple as they generate $458.1 million in free cash flow and have a market cap of $138.5 billion. PayPal (PYPL) trades at a 41.9x multiple as they generate $5 billion in free cash flow and have a market cap of $209.63 billion. Tesla (TSLA) trades at a 410.62x free cash flow multiple as their market cap is $1.05 trillion. 3M Company (MMM) trades at a 15.86x free cash flow multiple with a market cap of $103 billion and $6.5 billion in free cash flow. Meta Platforms (FB) trades at a 25.78x multiple on its $35.80 free cash flow, having a market cap of $923.27 billion.
There's no rhyme or reason as to how the market values individual companies, if there was, investing would be easy. Looking at several different companies, I think that PLTR should receive at least a 25x multiple on its free cash flow, if not more.
If my first set of projections ends up becoming correct, then PLTR would generate $27.376 billion in revenue and $7.66 billion in adjusted free cash flow in 2032. At a 25x multiple, this would place PLTR's market cap at $191.56 billion, which would be a 596.77% return. If the market placed a 30x multiple on PLTR's adjusted free cash flow, which is still under many of today's larger growth companies, it would place PLTR's market cap at $229.88 billion for a 716.13% return. If the market placed the same multiple on PLTR as it does for PYPL, then PLTR would have a $321.06 billion market cap, a 1,000% return.
Conclusion
There you have it, I believe PLTR can deliver 700%-1,000% returns during my investment time frame. Shares of PLTR have been under pressure lately, but the fundamental business is performing exceptionally well with many future prospects in the pipeline. I continue to view PLTR as a long-term investment, and I don't care what the share price did in 2021, and I really don't care what happens in 2022. I'm invested in PLTR because I believe this can generate exponential capital appreciation to my portfolio 10 years from now.
For me, the risk is worth the reward, and I'm not waiting for PLTR to have 5-10 years of data to determine if its valuation meets the criteria for a value investment. The capital I have deployed, I don't need today, and I won't need next year or the year after that. Some investors don't have the patience to wait a decade for their investments to materialize. Luckily, I'm not most people. Each one of my investments serves a purpose, and unlike my dividend companies, I'm swinging for another home run with PLTR. When I see articles saying PLTR has a fair value of $5, I laugh and think if someone is willing to sell me 1,000 shares of PLTR for $5,000, send me a message right now, and I will write you a personal check.
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