When thinking of strong earnings reports this past quarter, Astera Labs and AppLovin come to mind in terms of ticking critical boxes on fundamentals. However, one could argue that Palantir is tied for the top position on this list, although with Palantir, you pay for what you get with a valuation that is as outrageous as its CEO.
The company continues to report accelerating growth on a QoQ and YoY basis. The cherry on top is that fiscal year guidance was raised, and key metrics support continued growth down the line.
In Q1, the company reported $884 million in revenue for growth of 39%, up from growth of 36% last quarter and 21% last year. This represents QoQ growth of 7%. Perhaps most importantly, US commercial revenue drove the results, with 71% YoY growth and QoQ growth of 19% for the segment’s first-ever $1 billion annual run rate.
Key metrics such as commercial total contract value (TCV), US commercial customer count, US commercial remaining deal value (RDV) and RPO are supportive of continued growth in future quarters.
There are also robust cash flows and expanding margins to strengthen the story. What is this Perfect 10 worth? The market clearly loves this stock despite its 83 forward PS valuation; therefore, given Palantir’s ongoing invincibility, it’s truly anyone’s guess if the stock can sustain the valuation or not.
Background on Palantir’s Platforms
Palantir’s first platform was Gotham for government purposes before many of the integrated features were expanding to Foundry, which launched around 2021 for Commerical purposes (exact date is not available but generally understood to be around this time).
Gotham and Foundry create a unified data set for actionable insights across industries such as manufacturing, product development, and customer experience. The data that Palantir gets is from the customer database although the company may use other data sets for government customers, such as scraping social media or other publicly available information on the web. The traditional deployment includes hosting Palantir’s servers in a customer’s data center.
The difference between Palantir and other AI-enabled database competitors is that Palantir is able to answer questions a model cannot answer. Traditional business intelligence companies require a complete data set whereas Palantir is able to tackle situations where there is not a complete data set. You can think of the competitive advantage as being actionable depth, which Palantir has described as “the reasoning that goes into decision-making, not just data.”
The core platforms were built for the “ability to construct a model of the real world from countless data points.” Unlike a SQL database, natural language is used to query data and return results in real-time rather than through strings.
Gotham:
Palantir Gotham was the company’s first platform, built for government operatives in defense and intelligence sectors. The platform enables users to identify patterns hidden deep within datasets using semantic, temporal, geospatial and full-text analysis.
Here are some ways the platform is used:
- Graph application allows data objects to be seen as nodes and edges for the ability to visualize events, filter objects and plot characteristics
- Object explorer allows users to query billions of objects, somewhat similar to Apache Spark
- Browser allows perform search queries and surface information
Pictured Above: Gotham uses AI detection models
Pictured Above: Gotham uses ML models to detect objects and event matches acrsos varying sensor data types, satellite images, audio, text and video.
Foundry:
Palantir Foundry is the commercial offering and has four layers of tooling: Foundry Core, Data Foundation, Ontology and Workflows. This four-step process does the following, with the Ontology layer offering a distinct, competitive advantage:
- brings volumes of data into one place
- transforms the data into a format that analysts can work with and enables validation in any number of programming languages
- the “ontology layer” allows datasets to be turned into real-world concepts with the ability to accelerate on the company’s core ontology to reduce redundancy
- workflows is where it all comes together in an integrated environment for object exploration, point-and-click top-down analysis, code authoring, time series analysis, data science and application development. When a user has a question, it answers it using all layers and tools available
Pictured: Workflow builder on AIP platform
Pictured Above: AI-powered Shipments and Supply Chains using AIP platform
Apollo:
The Apollo layer provides continuous delivery and an automated configuration layer that allows Foundry and Gotham to work across all cloud environments and also in places where there is little to no connectivity. On top of Palantir being able to form conclusions from incomplete data sets, the company can also deploy its platform and applications anywhere.
Palantir’s marketing team says Apollo “goes where no SaaS has gone before” because it allows what is done on-premise to also run on multi-cloud SaaS with code that is deployed across all environments rather than written for a specific environment. The orchestration allows for on-hardware AI models to consume real-time data from sensors, radio, geo-data and time series data.
Where bandwidth is not an issue, the company transmits all raw inputs and enriched metadata from models. Where there are constraints, the platform transmits meta-data only which can reduce bitrate by 20X. At times, a simulated environment can be created with Palantir’s Edge AI from historical data to help train AI models. The simulated environment is then deployed at the edge. With Apollo, Palantir’s centralized operations team is capable of 41,000 updates per week at no additional cost.
Apollo Edge AI links together satellites to lower latency for the AI-enabled decision chain by orchestrating up to 237 satellites in what the company is calling a “meta-constellation.” This meta-constellation optimizes hundreds of orbital sensors and AI models to power Palantir’s models. One example is tracking submarines that pose a threat to the U.S. and its allies. In this case, submarines are being tracked on a granular level in areas where there is no bandwidth available. These are the kinds of obstacles that Palantir overcomes while being independent of one cloud environment, such as AWS or Azure.
AIP:
The Artificial Intelligence Platform has helped the stock surge in recent years as it integrates generative AI with operational data and workflows. When AIP is combined with Foundry and Apollo, it provides an AI service mesh that can run hundreds of microservices, scale compute through its Rubix engine and orchestrate updates through Apollo. Similar to Apollo, AIP Is independent from any one cloud environment.
AIP Ontology is what Separates Palantir:
The knowledge graph referred to as Ontology is a distinct advantage. The graph offers better context than a large language model would on its own – or as Palantir states, it’s “the reasoning that goes into decision-making.”
You will often hear the management team state large language models will become commoditized, which is a way of saying the software that is on top of the LLM is where value creation comes from rather than the LLM alone. For this reason, AIP is designed to not only be cloud agnostic but to also be LLM-agnostic as it works with any large language model – for example, OpenAI, Anthropic, Meta’s Llama, etc.
The platform also offers an AI agent workflows for building AI agents that are further optimized for specific use cases and customized through additional tools. Autonomous agents can be built and tested on the platform.
When it comes to security and governance, Palantir’s roots in government contracts means the software company is exceptional compared to peers in this area.
Palantir Reports Accelerating Growth YoY and QoQ, Raises FY Guidance
Palantir reported $883.9 million in revenue in Q1, beating estimates by more than $21 million. As stated above, this represents growth of 39%, up from growth of 36% last quarter and up from 21% last year. On a QoQ basis, Q1 accelerated 7% from Q4. This is an impressive performance given Q1 is typically one of the slowest quarters seasonally. For Q2, Palantir guided for $934 to $938 million in revenue, or 38% YoY growth.
Over the past seven quarters, revenue growth has accelerated nearly 27 points, an exceptional feat driven by reaccelerating government growth, persisting AI momentum in US commercial, and strong execution.
Driven by the strong Q1 report and upbeat Q2 guide, Palantir hiked its full-year revenue growth forecast by 5 points, a rather high-conviction move after just one quarter. Palantir now sees FY25 revenue of $3.89 to $3.902 billion for 35.9% YoY growth, a significant ~$150 million raise from its prior view for $3.741 to $3.757 billion for 30.9% YoY growth.
With that said, the updated FY25 guidance also suggests that revenue growth may begin to moderate in the back half of the year, given 1H growth is in the mid-38% range. There was a hint in the call that government could be lumpy, thus it’s likely to be the cause for H2 being slightly lower than H1. The other possibility for H2 being forecast to report slower growth would be Europe or other global weakness, which was present in this report.
Key Segments: US Commercial Revenue Growth Drives Results
US Commercial drove the results this quarter although Global Commercial was still at a lower growth rate than Government due to weakness in Europe. It’s clear to see in the numbers below that Government contracts remain crucial for Palantir’s success.
Government:
- Government revenue growth accelerated 5 points sequentially to 45% YoY to $487 million, accounting for 55% of revenue.
- US government revenue grew 45% YoY to $373 million, and international government revenue also rose 45% YoY to $114 million.
Palantir said US growth was driven by new awards reflecting growing AI software demand, while international growth was driven by UK healthcare and defense sector work and the new NATO contract.
In the call, the CEO used the word lumpiness when asked about government contracts, and notably, did not answer the question directly rather used it as an opportunity to talk about the overall business in both the quoted portion below and the lengthier response found here.
“Dan Ives:
Thanks. And, another amazing quarter. I mean, it's just — so my question is, given that what we're seeing in the government, isn't that another opportunity where you could actually gain more share of budgets as you go to more meritocracy? Like, Palantir should actually gain more dollars within the budgets of DoD and a lot of other agencies.
Alex Karp:
We're very optimistic about what we're going to do in the US, but the devil's in the details. And we're running this business for you with you as owners, which means it's like there's going to be maybe lumpiness, but we predict we're going to do very, very well […] “
There was mention on the call that they are seeing government demand globally minus Europe … although that could go against the trend toward sovereign AI.
Per management: “I would say as an unknown variable, we're seeing very significant demand for our software, our government software around the world outside of Europe. And those are early days, but the demand — the signal there is very strong.”
US Commercial Revenue Accelerates to 71%:
Commercial revenue growth accelerated two points sequentially to 33% YoY to $397 million, as Palantir is growing rapidly in the United States, yet faces persisting headwinds in Europe.
- US commercial revenue accelerated from 64% last quarter to 71% YoY this quarter to $255 million, surpassing a $1 billion annualized run rate for the first time on elevated AI demand. However, the guide for next quarter does indicate Q1 could be the peak with fiscal year growth of 68% guided.
- International commercial revenue declined (5%) YoY to $141 million, weighed down by soft European demand and a one-time revenue catch-up in Q4.
Not only did Palantir’s US commercial segment see revenue growth accelerate to the highest growth rate in nearly three years, but it also saw record growth in a handful of key metrics that support strong growth continuing through the year.
- US commercial accelerated 31 points YoY and 7 points QoQ to 71% in Q1, surpassing Q4 2023’s 70% level and the highest growth since Q2 2022. This strong growth means that Palantir’s US commercial segment is on track to rise more than 2.5x in two years.
- Palantir raised its FY25 US commercial growth guidance from 54% YoY to 68% YoY, projecting revenue of $1.178 billion, compared to $457 million in 2023. The raise represents about $100M more than previously expected.
US commercial customer count rose 65% YoY and 13% QoQ to 432, with Palantir adding 50 net new customers in the quarter. Palantir has added 111 net new customers in Q4 and Q1 combined, its highest two-quarter total on record.
The segment’s strong growth outlook is supported by robust key metrics:
- 2x YoY growth in US commercial deals closed above >$1M
- 127% YoY and 30% QoQ growth in US commercial remaining deal value to $2.32 billion
- 183% YoY growth in US commercial total contract value (TCV) booked of $810 million
Key Metrics Support Continued Growth
While US Commercial featured many strong key metrics yet NRR, RPO and Billings stood out with strong growth as well in Q1.
- Total remaining deal value (RDV) accelerated from 39.2% in Q4 to 45.6% in Q1 as it rose to $5.97 billion.
- RPO accelerated from 39.5% YoY in Q4 to 46.1% YoY in Q1 at $1.90 billion.
- Total contract value (TCV) booked increased 66% YoY to $1.5 billion.
- Billings rose 44.8% YoY to $905 million.
- Net retention rate (NRR) rose four points sequentially to 124%, its highest level in three years. Palantir pointed out that NRR should continue to expand in the coming quarters: “As net dollar retention does not include revenue from new customers that were acquired in the past 12 months, it has not yet fully captured the acceleration and velocity in our US business over the past year.”
Margins
Palantir’s margin profile is exceptionally strong, as the company continues to drive operating margin expansion while accelerating revenue growth. This helps the company’s Rule of 40 metric, which stands at 83 as it combines EBITDA margin with revenue – or more than double the ideal 40 that many SaaS companies set out to acheive yet cannot due to a lack of GAAP margins.
- GAAP gross margin was 80.4% in Q1, down 1.3 points YoY. Adjusted gross margin was 82.1%, down more than 1 point YoY.
- GAAP operating margin expanded to 19.9%, up more than 7 points YoY.
- Adjusted operating margin was 44.2%, up 8.5 points YoY. For Q2, Palantir guided its adjusted operating margin to 43.1%, which would represent a third consecutive quarter above 40% and up nearly 6 points YoY.
- GAAP net margin was 24.2%, up more than 7.5 points YoY.
- Adjusted net margin was 37.8%, up nearly 8 points YoY.
Palantir also boosted its full-year adjusted operating income forecast from its prior view of $1.551-1.567B to $1.711-1.723B. FY25’s adjusted operating margin is now projected to be 44.1%, up from its prior view of 41.6%.
EPS
Despite the top-line beat, Palantir met adjusted EPS estimates in the quarter at $0.13, up 68% YoY. GAAP EPS was $0.08, up 100% YoY.
Looking ahead through the rest of FY25, adjusted EPS growth is expected to decelerate, from Q1’s 68% YoY to 20% YoY by Q4. However, estimates have risen over the past three months – Q2’s growth rate has come up 11 points and Q3’s up by 9 points.
For FY25, Palantir is expected to see adjusted EPS growth of nearly 43% YoY to $0.58, before decelerating to 25% growth to $0.73 in FY26.
Cash Flows and Balance Sheet
Palantir stands out for its ridiculously strong cash flows, though operating and free cash flow margins moderated quite substantially in Q1 relative to 2H 2024.
- Operating cash flow was $310.3 million in Q1 for a margin of 35%, down from 56% in Q4.
- Adjusted free cash flow was $370.4 million for a 42% margin, down from a 63% margin in Q4. Palantir raised its adjusted FCF guidance for FY25 from $1.5-1.7 billion to $1.6-1.8 billion, implying an FCF margin of 43.7%.
- Adjusted EBITDA margin was 45%.
- Cash and equivalents totaled $5.43 billion, while debt was zero.
Conclusion:
Part of our process is to highlight stellar earnings reports and Palantir certainly qualifies. It’s hard to find a blemish in the company’s current quarter as it’s perhaps the best report the company has reported yet – which is saying a lot. We are certainly seeing companies at the data layer doing well in AI with Oracle also reporting strong results, and this is likely to be a theme in the coming years.
The valuation with Palantir is a gamble. The bulls believe they’ve speculated correctly, while there’s likely to be short sellers who do well with this stock too. PLTR is attempting to set a new bar for AI software with the 80 forward valuation, yet 39% revenue is a tricky spot to be as it barely qualifies as high-growth (yes, it’s US commercial segment does qualify, but you could say that for a few stocks trading a much lower valuations).
Congrats to all the Palantir longs, it’s certainly paid off in spades. As for the IOF, this isn’t one I was able bite on at the high valuation and that remains my conclusion at this time. If we can get a more reasonable valuation, however, we’d love to have this one in the portfolio.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
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