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Palantir stock is flying to the moon after its jaw-dropping earnings report

Earnings season is in full swing and investors are still eyeing one big topic: artificial intelligence (AI). Much of the enthusiasm for AI is reserved for the “Magnificent Seven” – a catchy nickname that includes mega-tech giants Microsoft, Apple, alphabet, Amazon, Nvidia, MetaAnd Tesla. But that doesn’t mean that other companies aren’t riding this wave.

With a market cap of just $51 billion Palantir Technologies (PLTR 2.75%) may not be seen in the same light as Big Tech, but Palantir is on the rise in this space too, and investors recognized this last week.

After releasing a stunning fourth-quarter earnings report on February 5 after the market closed, Palantir shares shot up about 50% over the next five trading days.

From revenue to operating margins to cash flow to customer acquisition strategies, Palantir gives investors plenty of key performance indicators to drool over. Let’s analyze the report and see what the company’s current performance could mean for its future. Although the company operates in the shadows of mega-cap technology, now could be a lucrative time to invest in Palantir as the company advances the AI ​​arms race.

Customer acquisition at its best

The year 2023 was full of exciting developments in the world of artificial intelligence. Microsoft has invested billions in OpenAI, the start-up behind ChatGPT. Alphabet and Amazon quickly followed suit, each investing in a competing platform called Anthropic.

To differentiate itself, Palantir developed a unique lead generation strategy to generate interest in its latest product, its Artificial Intelligence Platform (AIP). Specifically, the company began hosting immersive seminars it calls “boot camps.” During these sessions, participants will be able to try out Palantir’s software and better understand how the company can play a critical role in generative AI-driven use cases.

During Palantir’s fourth-quarter earnings call with analysts, investors learned that the company had completed over 500 boot camps last year. Only 92 of them were carried out in 2022. While it’s clear that the bootcamps are in high demand, a thorough analysis of the company’s customer growth is worth a look.

Palantir had 497 customers in the fourth quarter, a 35% increase compared to the same period last year. Palantir is seeing increasing demand, particularly in the private sector, with customer numbers increasing by 44% annually.

That’s important because for many years Palantir was criticized by Wall Street bears because of its heavy reliance on government business. It is clear that the emergence of AIP is increasing demand and the business is thriving outside of its previous public sector operations.

Image source: Getty Images.

Margins increase and cash flow increases

The chart below shows Palantir’s annual revenue over the past five years.

Image source: Palantir.

Palantir was founded in 2003 and the graph shows that it took nearly two decades for the company to reach the milestone of $1 billion in annual revenue. And yet, in just three short years, the company has doubled its revenue. This growth is astonishing considering how difficult the macroeconomic outlook has been in recent years, coupled with the tough competitive landscape.

Perhaps more importantly, Palantir is also generating healthy margin expansion, which directly impacts its bottom line. Adjusted for non-cash expenses such as stock-based compensation, Palantir’s operating margin increased from 22% in 2022 to 28% in 2023. Additionally, free cash flow increased 260% year-over-year to $730 million.

Some things to keep in mind

The combination of revenue growth and margin expansion has helped strengthen Palantir’s liquidity. As of Dec. 31, the company had $3.7 billion in cash and marketable securities and no debt on the balance sheet.

While this is encouraging, investors should consider the disparity between the company’s customer growth and its revenue growth. Although its customer base grew 35% last year, Palantir’s total revenue only increased about 17%.

To me, this signals that Palantir is playing the long game when it comes to AI. In other words, bootcamps are simply a cost-effective mechanism to bring customers into the pipeline and convert them into paying users of the company’s software. However, through a combination of AI-powered use case discovery and increased customer nurturing efforts, Palantir is able to upsell and cross-sell customers over time. Therefore, the company is likely to see a significant increase in sales over time.

I would caution investors against believing any hype narratives surrounding Palantir. It will be important to focus on the long-term picture and assess the company’s position among enterprise software providers specializing in AI.

For me, the fourth quarter report was a preview of what investors can expect on an ongoing basis. As artificial intelligence software becomes more important in IT budgets, Palantir should be well positioned to benefit from long-term tailwinds. Now looks like a great opportunity to snap up shares for both new and existing investors and prepare to hold them for the long term. The journey seems to have just begun.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions at Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Palantir Technologies and Tesla. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Palantir Technologies and Tesla. The Motley Fool has a disclosure policy.

Source: www.fool.com

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Robert Wilson

Business & economics analyst. Breaking down intricate financial trends for informed decision-making.

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