Palantir Stock: How High Is Too High?

Posted on November 12, 2024June 30, 2026 by io-fund

This article was originally published on Forbes on Nov 7, 2024,09:08pm ESTForbesForbes on Nov 7, 2024,09:08pm EST

Two weeks ago, I highlighted that Palantir is “one of the rare few that sees AI drive both real returns for its business and real value for its customers,” while it continues to crush its software peers in AI-related growth. AI offerings have driven a clear acceleration in customers and overall revenue, while many SaaS peers, such as MongoDB and Salesforce, struggle to say the same.

This week, Palantir proved again in Q3 that it’s undeniably one of the stronger AI software stocks in the market outside of the cloud hyperscalers. The company reported visible AI-driven growth and persisting business momentum for AIP, strong revenue acceleration to 30% YoY, combined with strong profitability – a rare combination for growth stocks.

Despite proving again that it’s one of the only software names with real revenue in the market, Q3’s report pushed the valuation even higher. Due to an outlandish valuation, price momentum may soon be approaching a peak.

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Blistering AI Momentum Continues

Palantir’s third quarter was characterized once again by strong underlying AI momentum. Palantir beat Q3 revenue expectations by more than $21 million, reporting revenue of $725.5 million in the quarter. The FY24 revenue guide was boosted to just above $2.80 billion, up from $2.75 billion last quarter.

Revenue growth continued to accelerate, with Palantir reporting revenue growth of 30.0% in Q3, ahead of its guidance for 25.2% growth and up from 27.2% in Q2.

Palantir’s Q3 highlights: Strong AI momentum with $725.5 million revenue, exceeding expectations by $21 million. FY24 revenue guidance increased to over $2.80 billion. Q3 revenue growth at 30.0%, surpassing guidance and Q2’s 27.2% growth rate. – I/O Fund

Q3’s results have marked quite the turnaround in just over a year for Palantir, with revenue growth accelerating more than 17 percentage points from Q2 2023 (AIP’s release) to Q3 2024. This was also the highest revenue growth rate recorded since Q1 2022.

AIP has been the primary driving force of this revenue reacceleration, with strong adoption in the US commercial segment. AIP’s scalability, interoperability and versatility allow it to quickly be integrated by enterprises. Commercial customers can lever Palantir’s AI and machine learning tools to harness the power of the latest large language models (LLMs) within Foundry and Gotham for near-instant analytics & insights, and productivity & efficiency gains.

For a closer look at AIP and how it separates Palantir from the rest of the SaaS universe, read This Stock Is Crushing Salesforce, MongoDB And Snowflake In AI Revenue.This Stock Is Crushing Salesforce, MongoDB And Snowflake In AI Revenue.

AIP Aids US Commercial Growth

What’s interesting to note in Q3 is that government revenue growth outpaced commercial growth, at 33% YoY versus 27% YoY, a contrast to recent quarters where commercial had been the primary driver. Government’s outperformance was driven by 15% QoQ growth in US government revenue, its fastest growth rate in 15 quarters, while commercial was impacted by a 7% QoQ decline in international commercial revenue due to European headwinds and “a step down in revenue from a government sponsored enterprise in the Middle East.”

However, US commercial growth remained strong in the quarter, with a growth rate nearly in line with Q2’s. Management said that AIP drove “new customer conversions and existing customer expansions in the US,” as AI models continue to be deployed into production. Here’s what the growth in US commercial revenue looks like:

Palantir’s US commercial revenue rose 54% YoY and 13% QoQ to $179 million, slightly decelerating from 55% YoY growth in Q2. FY24 US commercial revenue is expected to exceed $687 million, indicating at least $199 million in Q4 revenue, with ~52% YoY growth. – I/O Fund

US commercial revenue increased 54% YoY and 13% QoQ to $179 million, slightly decelerating from 55% YoY growth in Q2. Palantir guided for US commercial revenue to exceed $687 million, or 50% YoY growth, for FY24, implying Q4 revenue of at least $199 million, or ~52% YoY growth, representing a 2 point deceleration should it meet that target.

US commercial customer growth remained strong, with customers rising 77% YoY to 321 in Q3. This decelerated from 83% YoY in Q2. Here’s what the US commercial customer growth looks like:

US commercial customer growth remained strong, rising 77% YoY to 321 in Q3, slightly down from 83% YoY growth in Q2. Here’s what the US commercial customer growth looks like. – I/O Fund

US commercial customer count has essentially doubled since AIP’s release, but Q3 was the second quarter to show slightly slower customer growth, indicating that Palantir may be relying on existing customers to drive revenue, whereas customer acquisition should be monitored moving forward. Most importantly, NRR has risen to a two-year high, while RPO is surging, suggesting customer spend could remain elevated for the next few quarters.

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Net Retention, RPO Strong, but Watch US Net New Adds

In Q3, net dollar retention expanded to 118%, up from 114% in Q2, 111% in Q1, and 107% a year ago. Management said that this “increase was driven both by expansions at existing customers and new customers acquired in Q3 of last year, as we see the effect of the AI revolution in both industry and government.” Net dollar retention has reached the highest level in two years, but still has room to expand, given that rates were >120% in 2021 and 2022.

In Q3, Palantir’s net dollar retention rate increased to 118%, up from 114% in Q2 and 107% a year ago. This growth was driven by expansions at existing customers and new acquisitions, reflecting the impact of the AI revolution in both industry and government. Net dollar retention reached its highest level in two years, with further growth potential, previously exceeding 120% in 2021 and 2022. – I/O Fund

Palantir has an advantage over other software peers due to its differentiated AI offerings, while adding significant new customers this year and expanding deal sizes with new customers (with FY24’s additions not appearing until FY25) — this provides a path forward for NRR to continue expanding. Initial AIP customers are beginning to appear in NRR, and a few more quarters will provide a clearer picture of how far NRR could expand and at what level it will plateau.

RPO is also sharply rising, implying that customer spend is likely to remain strong over the next few quarters. RPO growth has accelerated over the past four quarters, from 27.8% in Q4, breaking a string of declines in the rest of 2023, to 58.6% YoY by Q3. This is the highest RPO and growth rate since the I/O Fund began tracking Palantir in late 2023, and another data point underlying its AI-driven momentum.

Palantir’s RPO (Remaining Performance Obligation) is sharply rising, indicating strong customer spending over the next few quarters. RPO growth accelerated over the past four quarters, from 27.8% in Q4 to 58.6% YoY in Q3. This is the highest RPO and growth rate since the I/O Fund began tracking Palantir in late 2023, highlighting its AI-driven momentum. – I/O Fund

However, net additions in the commercial segment are slowing, both in the US and overall. In Q3, Palantir added 31 net new customers in its commercial segment, down from 40 net new customers in Q2 and 52 net new customers in Q1.

This has been predominantly driven by the US, as international commercial has yet to scale. In the US, net new commercial customers have dropped over the past two quarters, falling from 41 net new adds in Q1 to 26 net new adds in Q3. There is a clear deceleration from peak customer acquisition following AIP’s ramp, where net new adds surged from 6 in Q2 2023 to 41 by Q1, before slowing again. Palantir has acknowledged hiccups and issues in its sales cycle, saying in Q1 that they are “at the way early days of figuring out how to actually get customers to buy [AIP]” and “we're not flawlessly executing on our sales motion.” The friction is appearing within lumpy net new adds.

US commercial has been a driving factor for Palantir, as the primary segment adopting AIP and concentrating AI momentum. Palantir guided for a larger QoQ revenue deceleration for Q4 than in Q3, implying ~26.4% YoY growth, a 3.6-point deceleration from 30% YoY. Last quarter, Palantir’s guidance implied a 2-point deceleration from 27.2% YoY in Q2 to 25.2% in Q3, but a significant beat pushed growth to 30%. – I/O Fund

US commercial has been a driving factor for Palantir as the primary segment adopting AIP and where this AI momentum is concentrated. Palantir guided for a larger QoQ revenue deceleration for Q4 than it had in Q3 – guidance implies revenue growth of ~26.4% YoY, a 3.6-point deceleration from 30% YoY. Last quarter, Palantir’s guide implied only a 2-point deceleration, from 27.2% YoY in Q2 to 25.2% in Q3 – the large beat pushed growth to 30% in the quarter.

Analyst estimates do support this, with Q4 revenue estimated at $777 million, nearly 1% above Palantir’s guide as the market expects a beat once more; yet given the size of the recent beat, estimates may be lagging the underlying business momentum. The estimates correlate to 27.8% YoY growth, a 2.2 point deceleration, while Q1 is expected to decelerate further to 24% YoY before continuing to decelerate in each quarter of FY25.

Cash Flow and Margins are Bonkers

Palantir is in uncharted territory, as it is separating itself as a rare breed in SaaS to see both strong and profitable AI-driven growth. The company’s revenue growth plus GAAP operating and net margins have been in the double-digit range for four consecutive quarters. Additionally, Palantir’s Rule of 40 (revenue growth + adjusted operating margin) reached 68%, up from 46% last year.

To be consistently expanding on the Rule of 40, from the ~40% range at the end of 2022 to nearly 70%, is important as it shows that Palantir is efficiently investing in AI to drive revenue growth higher while increasing its profitability.

Cash flow margins were bonkers in Q3 — operating cash flow was nearly $420 million, or a 58% margin, while adjusted free cash flow was $435 million, a 60% margin. This was a large step up from cash flow margins in the low-20% range in the first half of 2024.

For FY24, Palantir is targeting adjusted free cash flow in excess of $1 billion, implying a margin of ~36%. Fundamentally, to have revenue growth around 30%, free cash flow margin of 30%, and adjusted operating margin nearing 40% is impressive, to say the least.

Valuation is Stretched

Palantir is at Mount Everest valuations, trading at topline multiples more than double the next three most expensive enterprise and AI-exposed SaaS stock in the market – Cloudflare, ServiceNow, and CrowdStrike. At $55, Palantir is valued at 50x TTM revenue, and 45x forward revenue – its highest ever multiples, exceeding even 2021’s peak – versus 18x to 20x forward revenue for those three peers. Even down the line, Palantir is trading at double its peers, at 146x forward earnings, versus 88x for CrowdStrike and 71x for ServiceNow.

Palantir is trading at Mount Everest valuations, with topline multiples more than double those of Cloudflare, ServiceNow, and CrowdStrike. At $55, Palantir is valued at 50x TTM revenue and 45x forward revenue, the highest ever, surpassing 2021’s peak. In comparison, its peers trade at 18x to 20x forward revenue. Palantir’s forward earnings multiple is also double, at 146x, compared to 88x for CrowdStrike and 71x for ServiceNow. – YChartsYCharts

Growth investors should not forget when we saw this happen before; which was Snowflake, a Wall Street darling trading 2X more than any other cloud stock at 45X Forward PS with retail investors cheering Warren Buffet’s participation in the IPO. It currently trades at an 11.7 forward PS.

The primary question here is not whether Palantir is a strong AI stock, but will buyers continue to step-in?

Conclusion

Palantir’s Q3 report was met with quite the enthusiasm from the market, but the fundamentals must be immaculate at this valuation. RPO growth has surged over the past four quarters, while Palantir’s Rule of 40 continues to rise as adjusted operating margins expand and revenue growth accelerates. Net retention has risen to two-year highs, reaching 118% in Q3, as deal expansion continues.

However, Q4’s revenue guidance implies a larger sequential deceleration than what was expected for Q3, while US commercial net new adds continue to decline sequentially. This may sound like splitting hairs, but the company is priced far above what any peer is trading, and that typically doesn’t resolve well for tech investors.

Given the outsized valuation, the I/O Fund is looking for a lower entry in Palantir before adding the stock to our portfolio. Join the I/O Fund’s next webinar on Thursday, November 14th where Knox Ridley, Technical Analyst, will discuss the firm’s buy zones and targets for AI leaders. Learn more here.

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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Palantir’s Stock Is Priced For Perfection

Posted on July 22, 2024June 30, 2026 by io-fund

This article was originally published on Forbes on Jul 18, 2024,05:46pm EDTForbes Forbes on Jul 18, 2024,05:46pm EDT

We are no strangers to Palantir’s story, saying as far back as September 2020 prior to Palantir’s public offering that the “commercial sector is the growth story” for the company as it expands beyond government clientele. Heading into 2024, Palantir was exhibiting “multiple signs of acceleration” stemming from strong growth in its US commercial segment, driven by AIP, Palantir’s Artificial Intelligence Platform that lets customers lever Palantir’s AI and ML tools and harness the power of the latest large language models (LLMs) within Foundry and Gotham.

AIP and US commercial growth are still the main storyline for Palantir investors to watch moving through 2024, given the two are the pr imary growth drivers this year. A closer look in Q1 reveals that momentum is not slowing down for AIP, and US commercial revenue growth remains intact. Government revenue also bucked its trend of decelerating growth throughout 2023, rebounding from under 11% YoY growth in Q4 to 16% YoY growth in Q1.

However, Palantir’s management shed light on some potential hiccups in AIP’s sales cycle, which we outline below. Meanwhile, the market is pricing in a perfect story this year, which puts pressure on the stock to execute.

US Commercial Business Remains Strong

Palantir’s US commercial segment remained strong in Q1, with AIP driving strong customer growth as revenue growth accelerated on a sequential basis. Management continued to drill home AIP’s momentum in the quarter by saying: “US commercial business continues to see unprecedented demand driven by momentum from AIP.”

Palantir reported $150 million in US commercial revenue in Q1, an increase of 40% YoY.

Source: I/O Fund

US commercial revenue rose 40% YoY and 14% QoQ to $150 million in Q1, accelerating 100 bp on a QoQ basis. While this was technically a deceleration from 70% YoY growth last quarter, that came against an extremely weak comp, with the QoQ growth acceleration more reflective of Q1’s strength.

Management explained that the segment is “where we're seeing the greatest transformation. While Q1 is seasonally our slowest quarter, AIP adoption by new and existing customers helped drive notable growth in customer acquisition and revenue in our US commercial business.”

Palantir added 41 net new US commercial customers in Q1, an increase of 69% YoY and 19% QoQ.

Source: I/O Fund

Palantir added 41 net new customers in the segment, an increase of 69% YoY and 19% QoQ. This accelerated from 55% YoY growth in Q4. We also saw customer additions broaden beyond the US this quarter – the commercial segment (including international) reported total net new adds of 52. As a whole, commercial customer count rose 53% YoY and 14% QoQ to 427 customers.

This means that the commercial segment, driven by US commercial, once again dominated net new adds in the quarter. US commercial contributed 41 (and commercial 52) of Palantir’s 57 net new additions, or ~72%, compared to more than 90% of net new adds last quarter; the entire segment still contributed more than 90% of net new adds with international growth.

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AIP Interest Remains High

As has been the case since its launch just over a year ago, Palantir is continuing to witness elevated interest and high demand for AIP, and is offering developers a free trial to explore and build on AIP, but it is limited in user size and Ontology quantity.

Management said that “continued interest in AIP is loud and clear,” and shared an update on AIP bootcamp progress, saying that they have sustained the “high volume of bootcamps with over 915 organizations participating to date to meet inbound demand.” Palantir had completed 560 bootcamps across 465 organizations by February, tacking on an additional 450 organizations in just the past five months. Palantir did not share an updated bootcamp total.

Palantir also said that AIP was aiding in customer conversion and expansion, aligning with trends observed earlier in the year, where management said AIP bootcamps were “quickly converting to paying customers” or expanding existing customers’ contracts. US commercial deals rose 94% YoY to 136, and total contract value (TCV) increased 131% YoY in Q1 to $286 million. Overall, commercial TCV bookings increased 187% YoY to $505 million, with the US driving more than half of that.

In addition, Palantir said that it is “seeing substantial deal cycle compression. As one example, a leading utility company signed a seven-figure deal just five days after completing a bootcamp. Another customer immediately signed a paid engagement after just one day of their multi-day bootcamp and then converted to a seven-figure deal three weeks later.” We have seen Palantir’s quarterly deals accelerate following AIP’s launch, but we have also seen a larger proportion of deals on the smaller end, between $1 million and $5 million.

Palantir signed 87 deals in Q1, of which 27 were >$5 million and 15 of which were >$10 million.

Source: I/O Fund

Questions In Converting Customer Interest to Contracts

Despite the optimism and reiteration on elevated interest in AIP, CEO Alex Karp shared one key shortfall that the company has – which is difficulties in selling AIP.

Karp explained that Palantir is “at the way early days of figuring out how to actually get customers to buy our product. We are good at educating customers on what is the art of the possible, and then some portion of those customers buy it. So, I expect as we get better and better at that, our numbers will increase. But it is really early days. It's not — we're not flawlessly executing on our sales motion.”

While this could be viewed as a positive given the high interest in AIP, implying that Palantir is not closing as many deals as it potentially could, the market is pricing in perfection this year, and essentially looking for a beat and raise in every quarter this year. Having a sales model where management is still figuring out how to market and sell AIP to interested customers while the market wants acceleration sets the stage for a potential shortfall if Palantir cannot meet these elevated expectations.

International Headwinds Persist

Palantir is also facing some headwinds internationally, primarily in its European business.

International commercial revenue grew 16% YoY, but declined (3%) QoQ to $149 million, “as a result of continued headwinds in Europe and the revenue catch-up in Q4 that we noted last quarter.”

Management further clarified that they “do have headwinds in Europe, 16% of our business in Europe. Europe is gliding towards zero percent GDP growth over the next couple of years. That is a problem for us. There is no easy remedy for that.” Shifting into a low or no GDP growth environment may continue to pressure customer deal expansion and present headwinds to larger deal sizes if budget scrutiny persists.

Market Pricing Palantir’s Stock for Perfection

With Q1’s beat in store and US commercial still strong, the market is looking ahead for a strong year – essentially pricing in beat and raises each quarter this year, though Palantir’s extended valuation for barely 20% YoY growth enhances downside risk to shares given the international headwinds and the noted friction in its sales process.

Palantir reported $634 million in revenue in Q1, and guided fiscal Q2 revenue between $649 million to $653 million, an increase of 22.1% YoY at midpoint. For FY24, management guided revenue of $2.677 billion to $2.689 billion, up 20.6% YoY, with US commercial revenue of $665 million, for at least 45% YoY growth.

This translates to $1.285 billion in revenue in 1H, and $1.398 billion in revenue in 2H. However, analysts are expecting Palantir to generate $1.414 billion in 2H, with FY24 revenue estimates ranging from $2.68 billion on the low end to $2.80 billion on the high end. That’s about 4.4% higher than Palantir’s guide, suggesting analysts are expecting business momentum to accelerate each quarter with a beat and raise, and increased FY24 guidance.

Palantir’s valuation leaves little to no room for error here, trading at elevated levels compared to AI-exposed large-cap enterprise software stocks with similar top-line growth and bottom-line margins. For example, Palantir’s stock trades at more than 24x forward sales, versus less than 14x forward sales for ServiceNow, which has been reporting revenue growth of >24% the last three quarters, versus 17% to 21% for Palantir.

Other ‘best-of-breed’ software stocks trade at lower multiples, despite having stronger top-line growth rates than Palantir – CrowdStrike has pulled back to below 21x sales after hovering at 24x. Snowflake and Cloudflare trade at 12.9x and 16.3x forward sales, respectively. Since the start of 2023, best-of-breed software has repeatedly struggled to achieve or maintain a valuation above 24x sales, with most rerating back to the 16x level.

While investors can argue that Palantir deserves an ‘AI premium’ from its product suite, investors will still have to value it as a mature company rather than a hypergrowth SaaS, as it’s no longer in that basket. This is the most expensive Palantir has been on a top-line valuation since November 2021, with revenue growth nearly 30 percentage points slower.

Palantir trades at more than 24x forward sales, a premium to best-of-breed software peers.

Source: YChartsYCharts

Down the line, Palantir trades at nearly 89x forward earnings (non-GAAP), again at its most expensive level in more than a year, with adjusted EPS expected to grow 32% YoY to $0.33. ServiceNow trades below 55x forward earnings for 25% EPS growth, while CrowdStrike trades similarly to Palantir at 85x forward earnings. Snowflake and Cloudflare, both not profitable on a GAAP basis, trade far above 100x forward adjusted earnings.

If Palantir’s adjusted EPS growth does slow to <20% as currently estimated by analysts, its premium multiple risks rerating lower.

Palantir trades at nearly 89x forward adjusted earnings, again at its most expensive level in more than a year.

Source: YChartsYCharts

In terms of cash flow, Palantir trades at more than 100x operating and free cash flow multiples, with an operating cash flow margin of 20% and an adjusted FCF margin of 23% in Q1. ServiceNow trades at less than half of Palantir’s multiples, despite having a superior margin profile, at a 52% OCF margin and 47% FCF margin. CrowdStrike trades at 67x OCF with a 42% margin, while Snowflake trades below 49x OCF with a 43% margin.

Source: YChartsYCharts

Across the board, Palantir trades at elevated valuation multiples, whether it be on the top-line, bottom-line, or on cash flows, not only relative to peers, but also relative to itself, trading at its highest levels or near its highest levels of the past twelve months.

Conclusion

Palantir continues to exhibit strong momentum in its US commercial segment, with Q1 results reflective of this with sequential growth accelerating alongside customer count. While AIP demand remains elevated and a core driver of Palantir’s growth, management highlighted a pitfall in that there is friction in selling the product, a key risk to watch moving forward as the market is looking for nothing short of perfection through the end of fiscal 2024.

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Palantir Stock Surges From Artificial Intelligence Platform

Posted on February 20, 2024June 30, 2026 by io-fund

This article was originally published on Forbes on Feb 15, 2024,04:51 pm ESTForbes Forbes on Feb 15, 2024,04:51 pm EST

Palantir’s Q4 earnings confirmed an acceleration in its US commercial business as it closed out its first GAAP profitable year. Shares are reflecting the optimism surrounding Palantir’s commercial segment and bottom line expansion, with shares up more than 47% YTD and nearly 280% since the start of 2023.

We noted in our stock newsletter in December that Palantir was “exhibiting multiple signs of acceleration heading into 2024 with an improved fundamental backdrop driven by increasing AI demand. Palantir’s Artificial Intelligence Platform (AIP) is driving a significant acceleration in its US commercial business, while underlying metrics and the bottom line are rapidly improving.”

Revenue acceleration stemming from the commercial business is the major story for Palantir through 2024 and into 2025, with revenue growth poised to accelerate from 17% last year to 20% this year and nearly 21% in 2025.

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Strong Acceleration in US Commercial Is Driving Growth

In a deep dive at the time of Palantir’s direct listing, our firm said in 2020 that the “commercial sector is the growth story.” Palantir’s public offering was seen as a way to facilitate attracting and acquiring commercial clients before AI brought a wave of competition. The fruits of Palantir’s labor are beginning to pay off, with a newfound rapid acceleration in its US commercial business after AIP’s launch in Q2 was met with “unprecedented” demand. At its core, Palantir’s AIP is a comprehensive AI solution that lets customers lever Palantir’s AI and machine learning tools and harness the power of the latest large language models (LLMs) within Foundry and Gotham. Customers can deploy LLMs on their own private networks using their own private data, maximizing data security and improving efficiency by helping reduce data transfer and storage costs.

Although its US commercial segment accounts for less than 25% of quarterly revenue — it just surpassed a $500 million annual run rate in Q4 — it is now becoming the dominant factor behind the strong business momentum Palantir has seen over the past few quarters.

US commercial revenue rose 70% YoY to $131 million, a 37 percentage point acceleration from Q3 and a 58 percentage point acceleration from the year ago quarter. For the full year, US commercial revenue rose at more than double Palantir’s growth rate, increasing 36% YoY to $457 million.

The graph below illustrates just how strong the recent quarter was:

Source: PALANTIR

This acceleration in the US over the past two quarters is driving global commercial revenue higher. Palantir’s global commercial revenue accelerated by 22 percentage points, from 10% growth in Q2 to 32% in Q4. The segment topped a $1.1 billion annual run rate last quarter, up from a $920 million run rate two quarters ago.

Source: PALANTIR

While the revenue acceleration was the main headline for the US commercial business, a closer look reveals that the segment also drove more than 90% of Palantir’s customer additions with very strong underlying metrics.

Palantir reported 55% YoY and 22% QoQ growth in US commercial customer count to 221 in the quarter, as customer growth continues to accelerate. Over the past two quarters, Palantir has added 60 net new US commercial customers with 40 customers added in Q4 alone. This is more than 3X higher than the previous period of just 18 net new US commercial customers from Q4 2022 to Q2 2023.

Source: PALANTIR

Global commercial customers increased 44% YoY and 14% QoQ to 375 customers – representing 45 net new customer additions in the quarter. This means the US commercial segment drove more than 90% of Palantir’s net new customer additions in Q4. That compares to below 63% of net new customer additions in Q3 and just 20% in Q2.

This growth was “meaningfully driven by AIP” with Palantir saying that “demand is off the charts” for its new product. AIP is “propelling growth both through new customer acquisitions and expansions with existing customers,” with evidence of AIP bootcamps “helping to significantly compress sales cycles and accelerate the rate of new customer acquisition.”

Palantir had set a goal in October to hit 500 AIP bootcamps to drive top of funnel growth, and it has already surpassed that target, completing 560 bootcamps in just four months.

CRO Ryan Taylor commented on how this translates through to growth in the US commercial segment, with “70% year-over-year growth in revenue in Q4, 55% growth in customer count year-over-year, and a 107% growth in TCV closed on an adjusted basis […] Either it's — first, it's bootcamps that are quickly converting to paying customers or its expansion of existing customers or it's customers where maybe we've been engaged for a while and introduction of AIP, that whole process has been accelerated. We're seeing that across the board, and yet at the same time, we barely touched that addressable market.”

Engaging customers via bootcamps to then translating that engagement into new customer deals or expanded deals sets the foundation for sustained revenue growth at a higher rate, more so if it can drive its net retention rate higher.

A Note on Net Retention Rate

Palantir reported a company-wide NRR of 108% in Q4, but noted that it “does not yet fully capture the acceleration in our US commercial business” since customers acquired over the last twelve months are not reflected in the calculation. A majority of the net new customer additions have come in the last two quarters, suggesting US commercial NRR will be higher than 108% come the end of FY24 when this customer cohort is reflected. For context, Palantir reported an NRR of 150% at the end of FY21 in US commercial, but that likely fell significantly when growth slowed to a crawl at the end of FY22.

If AIP can continue to drive a high level of customer acquisition and expansion through FY24, this can help drive and maintain the revenue acceleration we’re seeing in the segment through FY25 and into FY26.

Valuation Remains a Risk Despite Strong Improvement in Fundamentals

Fundamentally, Palantir has seen major improvements throughout FY23, as it became the company’s first GAAP profitable year.

Gross margin has expanded consistently throughout the year, rising 300 bp YoY from 79% to 82% in Q4. GAAP operating margin shifted positive and expanded in each quarter in 2023, rising from (4%) in Q4 2022 to 11% last quarter.

Net income growth has been particularly strong, with Palantir generating nearly $210 million in net income during the year, compared to nearly ($374 million) in 2022. Cash flow generation has improved substantially, with operating and free cash flow both more than doubling QoQ in Q4 to over $300 million. Palantir ended the year with a 32% OCF margin and a 33% adjusted FCF margin.

Source: YCHARTS

While the fundamentals are certainly supporting an increase in Palantir’s share price, the AI hype may be overshooting the near-term potential for returns at this level. What’s striking is that investors are paying prices last seen when the market set a major top in November 2021, meanwhile the 2021 growth story is decoupled from management’s long-term 30% revenue growth target.

In early 2021, Palantir’s management expected to reach $4 billion in revenue by 2025 as they expected more than 30% annual revenue growth each year for the next five years, or through 2026. Palantir exceeded this target with 34% growth in 2021, but a macro-inflicted deceleration in late 2022 and early 2023 has practically nullified its ability to reach that $4 billion target after posting 24% growth in 2022 and just 17% in 2023. Current analyst estimates point to nearly 21% growth to $3.22 billion in revenue in 2025, meaning Palantir is one year off track – it’s projected to reach the $4 billion milestone in 2026, one year later than expected.

To reach $4 billion by the end of 2025, Palantir would need to record 35% growth this year and next, about 15 percentage points above estimates for both years. While AIP is aiding strong acceleration in the US commercial segment, it’s unlikely to drive revenues to that target. As a result, shares may be pricing in perfection for AIP and AI-related stock performance.

Source: YCHARTS

Prior to Q4’s earnings, Palantir was trading near its average P/S ratio of 18x, but the strong rally has now taken shares to over 26x P/S and 20x forward P/S – this is the highest level since late 2021 yet growth has slowed. On a cash flow basis, shares are trading at around 60x 2024’s projected $800 million to $1 billion in adjusted FCF.

Palantir’s shares are no longer cheap. It’s the third most expensive enterprise software stock on a forward P/S basis, behind Cloudflare and Snowflake, despite having the slowest forward revenue growth rate by more than 700 basis points, at 20% compared to 27% to 30% for the other two. This valuation may open up the door for downside throughout the year as it leaves no room for error, considering its lower revenue growth rate compared to peers; in addition, any dampening to growth stock sentiment from higher-for-longer rates with cut expectations being pushed back further in the year also presents a potential headwind for shares.

Conclusion

Enterprises are showing elevated interest in Palantir’s Artificial Intelligence Platform, which is translating to new customer additions. AIP’s early success in the US commercial segment drove Palantir’s new customer additions in Q4. US commercial revenue is accelerating significantly, reaching 70% YoY growth in Q4 from 33% in the prior quarter.

Management’s commentary about how Palantir is engaging and converting customers via bootcamps sets a foundation for a sustained acceleration thanks to a rapid customer acquisition cycle. However, the size of the US commercial business at less than 25% of quarterly revenues means that the AI-related acceleration may not be enough to sustain the stock’s current valuation.

I/O Fund Equity Analyst Damien Robbins contributed to this analysis.

Recommended Reading:

AI Driving Acceleration For Big 3 Cloud Stocks

Posted on February 13, 2024June 30, 2026 by io-fund

This article was originally published on Forbes on Forbes Forbes on Feb 8, 2024,07:01pm EST

Big Tech’s participation in the market’s push to all-time highs is becoming increasingly narrow, with Nvidia, Meta, Microsoft and Amazon serving as the primary contributors to 2024’s rally. Though Alphabet fell more than 7% on somewhat disappointing Google ad revenue, Alphabet’s Google Cloud, Microsoft’s Azure, and Amazon’s AWS shined as generative AI products drove an acceleration in cloud revenue growth in the recent quarter.

Source: Trading View

The Big Three’s cloud segments are crucial to business performance on both the top and bottom lines: Azure sits as Microsoft’s fastest growing segment (excluding Xbox’s more than 40 percentage point impact from Activision in Q2), AWS is driving a lion’s share of Amazon’s operating income, while Google Cloud is now generating more than 10% of revenue as Alphabet’s fastest growing segment while expanding its operating margin.

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Microsoft’s Azure

Azure witnessed the strongest AI contribution by far, as Microsoft works to extend its lead as the first major tech player to monetize enterprise and consumer AI subscriptions at scale. Azure also is powering a handful of the largest LLMs and AI assistants on the market, from OpenAI’s ChatGPT to Meta’s Llama and Llama 2 to Microsoft’s own Bing Copilot.

We highlighted in October in our free newsletter that AI would help drive a ‘noticeable acceleration’ for Microsoft’s revenue this year, and that’s exactly what we’re seeing: revenue growth accelerated from 8.3% YoY in fiscal Q4 2023 (calendar Q2) to 17.7% YoY in fiscal Q2 2024 (calendar Q4).

Azure growth was 30% in fiscal Q2, a 200 bp QoQ acceleration driven by strong demand for consumption-based services. Yet AI’s impact was quite notable: Microsoft said the 30% growth rate for Azure included “6 points from our AI services.”

Source: Microsoft

This 6 point contribution is impressive, given that AI services contributed 3 points to growth last quarter and 1 point in fiscal Q4 — a significant ramp considering the scale that this growth is attached to, with Azure’s revenue at a $74 billion run rate. This AI-related growth has helped Azure’s growth re-accelerate after seeing decelerating growth for five straight quarters.

Azure’s AI customer growth has also been rapid, and Microsoft is seeing an increase in larger commitments for Azure. Microsoft reported that Azure AI customers totaled more than 53,000 last quarter, with one-third of these new customers over the past twelve months. That implies customer growth rate of approximately 50% YoY, given that Microsoft added nearly 18,000 customers through 2023. More than half of the Fortune 500 are using Azure OpenAI Services, highlighting the strength of Microsoft’s AI offerings.

For Azure specifically, management said on the earnings call that “customers continue to choose Azure to simplify and accelerate their cloud migrations. Overall, we are seeing larger and more strategic Azure deals with an increase in the number of $1 billion-plus Azure commitments.” An increase in customer count and an increase in deal size are foundations for sustainable long-term growth and supportive of further acceleration in the coming quarters.

Amazon’s AWS

Q4 was a busy quarter for Amazon as it rolled out many new features, capabilities and hardware designed to capture generative AI demand, with AWS showing a hint of accelerated growth. AWS finally accelerated in Q4 for the first time in 2 yearsQ4 for the first time in 2 years, with Amazon reporting 13.2% growth in Q4, up just over 1 point from Q3’s 12%. AWS is now quickly approaching a $100 billion annual run rate, delivering $24.2 billion in revenue in Q4 and $90.8 billion in revenue for 2023.

What’s more important is that AWS’ operating leverage has improved over the last two quarters, with operating income growing at 3x the rate of revenue in Q4.

Source: Amazon

AWS’ operating income increased 39% YoY on a constant currency basis in Q4, with operating margin increasing 530bp YoY to 29.6%. For the full year, AWS’ operating margin was 27.1%, down 140bp YoY as operating leverage decreased in the first half of the year as growth decelerated from the 20% range to the 12% range.

AWS remains Amazon’s primary generator of operating income (67% of Amazon’s total operating income in 2023), a trend that can strengthen with AI driving accelerated customer and revenue growth and decreased costs. CEO Andy Jassy explained that AWS “added more than $1.1 billion an incremental quarter-over-quarter revenue, which on an FX neutral basis is more than any other cloud provider as far as we can tell.”

AWS’ existing customers “are renewing larger commitments over longer periods and migrations are growing,” and “while cost optimization continued to attenuate larger new deals also accelerated.” That includes recent agreements with Nvidia to be the first CSP to deploy the GH200 Grace Hopper Superchips with multi-node NVLink technology, and with Salesforce to deepen AI and data integrations between the two.

Bedrock is already witnessing strong adoption, with management seeing “many thousands of customers using the service after just a few months” as AWS continues to add “new models from Anthropic, Cohere, Meta with Llama2, Stability AI and our own Amazon Titan family of LLMs.”

Although AWS’ quarterly growth rates look paltry compared to Azure’s 30% and Google Cloud in the high-20% range, it is still showing all the ingredients for a sustained AI-driven acceleration.

Google Cloud

Google Cloud revenue accelerated four points from 22% in Q3 to 26% in Q4, topping $9 billion for the first time, helped by an increasing contribution from AI. Q4’s $9.2 billion in revenue implies that Google Cloud is just crossing above a $36 billion annual run rate, less than half of Azure’s run rate and 60% below AWS’ $90 billion run rate.

Google Cloud’s operating margin in Q4 came in at 9% compared to 3% in the previous quarter and (0.2%) in Q4 last year. Margins are naturally worse than AWS and Azure as Google Cloud does not benefit from the same efficiencies at scale; however, it is positive to see strong QoQ and YoY improvement in operating margin as it bodes well for future performance at a larger revenue scale.

Source: Alphabet

This acceleration in Q4 also helped narrow the gap to 4 percentage points with Azure, compared to 7 percentage points in the previous quarter. Google Cloud had previously topped Azure’s growth rates in late 2022 and the first half of 2023 before a rather swift deceleration in Q3. What’s crucial here over the next few quarters is Google Cloud continuing to close this growth rate gap with Azure, and possibly surpass Azure once more — it should be theoretically easier to realize higher growth rates at a smaller scale, more so when leveraging AI.

Like AWS and Azure, Google Cloud is seeing strong momentum with AI products. Management said that the “strong demand we are seeing for our vertically integrated AI portfolio is creating new opportunities for Google Cloud across every product area,” while its generative AI portfolio helped win and expand deals. CEO Sundar Pichai said that “greater than 70% of gen AI unicorns are using Google Cloud,” and customers including Anthropic and Mistral AI are building and serving LLMs on Google Cloud’s AI Hypercomputer, which combines Google’s “TPUs and GPUs, AI software and Multislice and Multi-host technology to provide performance and cost advantages for training and serving models.”

Google Cloud led the charge in monetizing AI via subscriptions with Duet AI for $30/month, and management noted that customers are “increasingly choosing Duet AI” to “boost productivity and improve their operations.” Duet AI will soon incorporate Google’s Gemini, its multi-modal family of LLMs developed to challenge OpenAI’s GPT-4. Google Cloud is “intensely focused on bringing the benefits of Gemini” to its cloud customers, and the rollout of the top iteration, Gemini Ultra, at a $20/month subscription could help Google gain share away from OpenAI and thus Azure while increasing revenue.

Conclusion

Big Tech’s cloud units reported strong growth in calendar Q4, with AI helping drive a noticeable acceleration for Azure while AWS and Google Cloud touted strong contributions from generative AI products. The trio all possess the necessary ingredients for sustained accelerations or maintained growth at higher levels: increased customer migrations, larger and longer duration contracts, monetization opportunities within the suite via subscriptions, and improvements in productivity and cost reductions for cloud customers.

I/O Fund Equity Analyst Damien Robbins contributed to this analysis.

Recommended Reading:

Palantir, Three Other Cloud Stocks Poised For An Acceleration In 2024

Posted on December 19, 2023June 30, 2026 by io-fund

This article was originally published on Forbes on Dec 14, 2023,10:42pm ESTForbes Forbes on Dec 14, 2023,10:42pm EST

Cloud stocks have been a mixed bag for investors heading into the end of the year, as a handful of names — Confluent, Sprinklr, HashiCorp, Bill, Paycom — plunged following their earnings reports with growth set to slow, while others — Datadog, Elastic, Salesforce – soared on renewed optimism about AI prospects.

Overall, cloud has lagged broader tech’s rally this year, and on a 3-year basis, returns are still negative, compared to a 27.4% gain for the QQQ. Many cloud darlings in 2020 and 2021 remain far below those highs – take Fastly, for example, where quarterly growth has slowed from the 40% range to the teens, with shares nearly (-80%) lower.

Source: I/O FUND

2023 was a stock picker’s market, and 2024 likely will be as well, with revenue growth rates for a majority of the sector set to slow. Only a few cloud stocks are expected to see revenue growth rates accelerate in 2024. We detail for you the four stocks set to accelerate below.

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Palantir

Palantir is one of the Street’s AI favorites this year with a 179% YTD return. The company is exhibiting multiple signs of acceleration heading into 2024 with an improved fundamental backdrop driven by increasing AI demand. Palantir’s Artificial Intelligence Platform (AIP) is driving a significant acceleration in its US commercial business, while underlying metrics and the bottom line are rapidly improving: Palantir posted its first GAAP profitable quarter in February and has since reported four consecutive GAAP profitable quarters.

Customer and US commercial customer growth remains solid, growing 34% and 37% YoY respectively in Q3. CRO Ryan Thomas noted that the US commercial business accelerated in Q3, and excluding strategic commercial contracts, it grew 52% year-over-year and 19% sequentially. Total contract value in the segment increased 55% year-over-year on a dollar-weighted duration basis, with an “acceleration of larger deals and shorter times to conversion and expansion.” He attributed this growth partially to the AI Platform, as the “rapid expansion of AIP at both our existing and new customers, and the impact it is having on their operations is nothing short of remarkable.”

The AI Platform’s growth since its launch in June has also been remarkably strong, with Palantir nearly tripling the number of users in the past quarter, with over 300 organizations using the product in 5 months. Palantir’s profitability is allowing it to continue to “more aggressively invest” in the AI Platform without sacrificing margins, a key differentiator from a majority of cloud AI plays, who are investing in growth at the expense of margins.

Fundamentally, Palantir is becoming stronger. GAAP gross margin expanded above 80% for the first time in Q3, GAAP operating margin has expanded to 7.2%, and GAAP net margin has risen to 12.8%. Palantir’s EBITDA margin also reached 16% in Q3, its first quarter with a double-digit positive margin, while adjusted free cash flow margin reached 25%. Margins have expanded sequentially in both Q2 and Q3, so the next hurdle will be showing further expansion in Q4 to set up for an increasingly positive trajectory in 2024.

Source: I/O FUND

Revenue growth is poised to accelerate in Q4 and through 2024, boosted by AI demand, a reacceleration in Palantir’s US government segment, and continued strength in the US commercial segment stemming from the Artificial Intelligence Platform. Palantir is currently projected to report 18.5% YoY growth in revenues in Q4, the highest in five quarters, pulling 2023’s full-year revenue growth rate up to a projected 16.5%. 2024 is expected to see an acceleration, with current projections pointing to a 320 bp acceleration in Palantir’s revenue growth rate to 19.7% YoY.

Source: SeekingAlpha

Palantir’s underlying metrics support the revenue reacceleration story, but the stock is by no means cheap at 14.2x 2024 EV/revenue and approximately 52x 2024 operating cash flow. Palantir also noted in Q3 that its net dollar retention rate was 107%, with adverse impacts from its European commercial business. This presents a risk that a land-and-expand strategy places more emphasis on signing more customer deals each quarter, and a slowdown in customer additions raises the risk that the expected revenue acceleration won’t pan out as projected.

Shift4 Payments

Payments processing firm Shift4 Payments is not a traditional cloud stock, but it has seen significant momentum within its cloud product, SkyTab, alongside positive momentum in a land-and-expand model for its software offerings. Shift4’s recent M&A activity with Appetize and Finaro are expected to significantly contribute to revenue and EBITDA, playing a role in its 1140 bp projected revenue growth acceleration from 31.3% this year to 42.7% in 2024.

Shift4 says it is currently “in the midst of a very successful consolidation” of SkyTab POS, with some of the success owing to a significant total cost of ownership (TCO) advantage relative to competitors. Shift4 installed 8,254 SkyTab systems in Q3, or more than 35% of its cumulative install volume since its launch. Bringing existing customers over to SkyTab boosts ARPU as it is resulting in higher subscription fees per merchant.

Finaro and Appetize’s acquisitions are expected to be accretive to revenue and EBITDA growth starting this quarter and expanding in 2024. Combined, the two are expected to contribute nearly $25M in gross revenue less network fees and $6M in EBITDA in Q4. With Finaro in particular, Shift4 is expecting “a very strong Q4 ahead” as “numerous enterprise accounts have begun processing.”

Financially, Shift4 is the strongest of the four, hitting records across a majority of its metrics, from end-to-end payment volumes, revenue, gross profit, and margins. Gross profit rose 34% YoY to $171M and reached a record 26.7% margin, leading to more operating leverage down the line as operating margin expanded to a record 7.9%, up 490 bp YoY. Net margin improved for a second straight quarter to 4.8%, though it remained 310 bp lower relative to a peak at 7.9% in Q3 last year. Adjusted free cash flow grew 69% YoY to $75.5M.

Source: I/O FUND

In 2024, revenue growth is forecast to be >40% YoY in each quarter, from ARPU expansion from SkyTab, net new merchant additions, and contributions from M&A synergies. This represents a rapid acceleration after a four-quarter deceleration, with quarterly revenue growth rates back to levels seen in 2022. However, the main risk to this case is that a pretty swift deceleration is projected in 2025, with revenue growth dropping back to the 28% range. A more uncertain macro backdrop may create some headwinds in 2024 and lead to early signs of a deceleration sooner than expected in late 2024 or 2025.

AvePoint

AvePoint provides cloud migration, management, and data protection solutions primarily for Microsoft 365, with a suite of products and AI/ML offerings for both cloud and hybrid/on-prem workloads. CEO TJ Jiang is aiming for the company to become a “key enabler of generative AI adoption within enterprises in the coming years,” as he believes AI “will drive a wave of enterprise transformation across all industries.”

Generative AI “obviously is playing a part into the future quarters,” according to Jiang. The launch of Microsoft’s Copilot AI assistant for enterprise 365 users serves as a major tailwind for 2024. This boost, alongside a continued shift to the cloud in Microsoft Office’s commercial customer base, is underpinning an expected 70 bp acceleration in revenue growth to 16.4% in 2024 before a stronger 330 bp acceleration in 2025 to 19.7% growth.

Customer expansion can also help this acceleration pan out, especially if advanced talks with large customers can translate to expanded deal sizes in Q4 and early 2024: AvePoint is in talks with a long-time customer to accelerate their cloud migration, another customer is in “advanced talks” to purchase AvePoint’s Opus solution, and a UK customer is considering expanding the scope of their deployment of AvePoint’s Secure Backup Service Solution.

Source: I/O FUND

AvePoint’s financials are improving, though it is not yet GAAP profitable, reporting a GAAP operating loss of ($0.3 million) in Q3, or a margin of (-0.4%). GAAP net margin was (-5.8%), a solid improvement from the (-12%) to (-24%) range reported over the last six quarters. EBITDA margin was 1.2%, the first positive quarter; moving forward, AvePoint needs to keep improving these metrics and post consecutive quarters with positive EBITDA and move closer to GAAP profitability on the bottom line.

Source: I/O FUND

However, there is one red flag, and that’s in AvePoint’s ARR. ARR growth has been decelerating, from the high 30% range in 2021, to 23% in Q3, and now to a guided 22% YoY in Q4 to $262M. The bull case will be looking for this to bottom in Q4, and the company’s history of raising guidance each quarter this year suggests Q4’s ARR growth could come in slightly above the guide at 23%. In addition, Q4’s net new ARR guide is pointing to a sequential decline to ~$11.4M, but management clarified that this stems partially from macro headwinds but also from a spike in government strength and subsequent revenue pull-forward in Q3.

Source: I/O FUND

This guided sequential decline in net new ARR raises another hurdle for the bull case – a resumption of sequential growth in net new ARR in Q1 and Q2 next year will support this view for revenue acceleration. A further deceleration in net new ARR or ARR will raise the risk that revenue growth fails to accelerate YoY.

AvidXchange

Accounts payable automation and payment solution provider AvidXchange rounds out the list with a minimal 30 bp revenue growth acceleration from 18.6% in 2023 to 18.9% growth in 2024. AvidXchange has posted nine consecutive quarters exceeding its guided outlooks, and this momentum adds a layer of confidence to the acceleration story since a few key metrics continue to decelerate.

Healthy top of funnel growth and a partnership with AppFolio coming online in Q1 next year are two growth levers driving revenue growth higher. AppFolio’s partnership could help drive a reacceleration in transaction volume and payment volume, as AvidXchange will be the first AP application solution in AppFolio with access to more than 19,000 customers.

Fundamentals are improving, but similar to AvePoint, AvidXchange is not yet GAAP profitable. GAAP gross margin is steadily expanding, and is now nearing the 70% level after crossing the 60% threshold in Q1 2022. GAAP operating and net margins improved significantly, by more than 1200 bp sequentially. However, AvidXchange does not yet have the operating efficiency nor leverage to take last quarter’s GAAP net margin of (-8.7%) to GAAP profitability within a few quarters.

Source: I/O FUND

Revenue growth is expected to bottom in Q4 and then accelerate in each quarter next year. Q4’s guide is implying a 500 bp sequential slowdown, so the challenge will be quickly bouncing back to >18% revenue growth. However, this acceleration story comes with two main risks – decelerating growth in both TPV and processed transaction volume. Both metrics have decelerated rather sharply, and have not yet shown signs of stabilizing or reaccelerating.

Source: I/O FUND

Conclusion

Cloud has proven to be a very volatile sector over the past few months. Multiple companies have seen 20% or larger moves in either direction following earnings as investors praised hints of accelerating growth or slammed decelerating metrics. Only a handful of cloud stocks are expected to see revenue growth accelerate in 2024 based on current estimates, and only two of the four covered here have substantial near-term tailwinds from AI, but all are seeing steadily improving fundamentals with a handful of intact growth levers for 2024.

Missing expectations is a risk to any of the four, but more so for AvePoint and AvidXchange given that their expected acceleration is minimal. Palantir’s near 200% YTD surge has been warranted because of a shift to GAAP profitability, but its valuation remains expensive and at risk if growth slows slightly. Shift4 arguably holds the strongest fundamental picture of the four, but a higher degree of risk stems from a quick return to decelerating revenue growth in 2025.

I/O Fund Equity Analyst Damien Robbins contributed to this analysis

Recommended Reading:

June Stock Tip: Microsoft Valuation And Buy Plan

Posted on June 23, 2023June 30, 2026 by io-fund

Please reference our fundamental analysis on Microsoft here: “Microsoft: AI Will Help Drive $100 Billion in Revenue.”

Valuation:

In the case of Microsoft, we have used a sum-of-the parts valuation model alongside traditional metrics to determine a price target. The SUTP helps to separate and value the three main businesses – Intelligent Cloud, Productivity and Personal Computing – as each have different growth profiles.

Factoring in the AI/ML drivers we’ve described, we revisited our sum-of-the parts analysis. These drivers will have the biggest impact on the Productivity and Intelligent Cloud Businesses.

We believe the implied market multiple assigned to the Intelligent Cloud and Productivity businesses still undervalues the potential revenue opportunities.

As Microsoft continues to further integrate AI/ML into its offerings, this will further strengthen its core offerings and be the catalyst for new ones. This will provide new revenue opportunities from its installed Fortune 500 client base which we believe warrants a higher multiple.

Under our base case scenario, these drivers increase the SUTP by $40 per share and under the bull case by $70 leading to a total SUTP of between $360 and $390 versus the current price of $330.

Conservatively assuming that Microsoft’s group operating margins remain at current levels, a $100 billion increase in revenue could potentially add an additional in $40B in operating profit.

Based on this scenario, MSFT AI could earn $4.67 (vs MSFT consensus of $9.65 FY 2023). Placing a 30x multiple on gets you about $140 per share. So MSFT + MSFT AI = $485.

To be conservative for now, we can say MSFT AI may generate between $4.00 to $5.00 per share in earnings.

We can also take the avg of the 2 SUTP (390 + 485) for a SUTP value of about $440 over the next few years under the 100B AI scenario.

Buy Plan:

Considering where we are in the business cycle, it’s best to understand Microsoft within the context of the broader market. Our general market outlook is that the market will likely experience a bout of volatility into the summer.

As long as the S&P 500 holds the 4225-4200 region, we can continue to see a continued bullish swing into later 2023/early 2024, before the recession starts to get priced into equities. Until the FED starts a fresh liquidity cycle, and we get eyes on the extent of damage the 2022 rate cycle caused in the economy, we expect choppy price action with a downward bias, with the potential for one more-larger push higher, at most. If this plays out, we could see the NASDAQ-100, and even the S&P 500 make new highs; however, small caps, financials, and many other economically sensitive areas of the market have likely topped.

That being said, there are two general paths we are tracking in MSFT:

Blue – As bullish as price action in Microsoft has been, we only have a 3-wave move off of the January low in Microsoft. This leaves the door open to the uptrend in 2023 being the corrective bounce in a much larger corrective pattern that began in early 2022. The catalyst would likely be macro, as it relates to the manifestation of a credit cycle downturn that is not currently being priced into equities right now. We would need to see price break below $260.50 in the coming summer volatility. If this happens, then we will be targeting a retest of the January lows.

Red – On the other hand, this 3-wave move off the January low, can turn into a 5 wave move. This would require the summer volatility to hold within the green target box below, and then turn back up to make a fresh high. If this happens, then THE low is likely in for MSFT.

Our buy plan is to accumulate based on both scenarios playing out. So, we will start adding to our position in the $300 – $265 region.

We share buy plans such as this one every week in our premium webinars held on Thursdays at 4:30 pm EST. We also issue real-time trade alerts when we do buy and are one of the only audited portfolios available to retail investors. Our performance exceeds institutional all-tech portfolios. Learn more here.Learn more here.

Microsoft – AI Will Help Drive $100 Billion In Revenue By 2027

Posted on June 20, 2023June 30, 2026 by io-fund

This article was originally published on Forbes on Jun 15, 2023,11:18pm EDTForbes Forbes on Jun 15, 2023,11:18pm EDT

Given the runup in AI-related valuations, separating the real deal from companies that are merely AI wannabes is critical. The first few things to consider are, will this company see revenue from AI and, if so, how soon.

Source: YCHARTS

Although many AI stocks will not report enough AI revenue to survive the fierce, competitive battle the tech industry faces due to AI/ML, Wall Street investors can reasonably assume that Microsoft will be a leader in this space. Microsoft’s AI platform is rather insulated from widespread competition outside of Google Cloud and AWS, and the company’s software assets are particularly well suited for AI advancements, such as Office 365.

In April of 2022, our firm re-entered Microsoft with a note to our premium research members about the company’s dominance in AI before Chat-GPT3 was released. We repeated this in October of 2022 when we called Microsoft a “sleeping AI giant”:

“Microsoft is a sleeping AI/ML giant. Google gets a lot of attention here yet I think they are equally prepared to serve this market […] To help Microsoft rival Google, the company has been investing in OpenAI, which is a large R&D operation that is breaking ground with AI algorithms that help computers to create images from text, reduce the amount of code that developers need to write, and to also help robotics think and act like humans, among other things […] DALL-E is a “12-billion parameter” version of GPT-3 that creates images from text. The partnership with Microsoft will bring DALL-E to apps and services, including the Designer app and Image Creator tool in Bing and Microsoft Edge – this was announced earlier this month at Ignite.”

Analysts have been raising their price targets to the high $300s with an Evercore analyst raising his price target to $400 stating: “the infusion of AI across Microsoft’s product portfolio represents a potential $100 billion incremental revenue uplift in 2027.”

To provide some context, Azure and Office 365 helped Microsoft add almost $100 billion in revenue over the past four years. It increased from $110 billion to $198 billion in revenue. The stock appreciated 180% over that time frame. At the time, the market did not comprehend the revenue potential in these two businesses. We believe that history will repeat itself and the market is underestimating the impact AI will have on MSFT’s future sales growth across its business lines.

However, valuation poses a risk to Microsoft’s current stock price, and as outlined below, our firm prefers to wait before we add again to our position.

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6 Ways Microsoft Can Drive Another $100 Billion with AI:

Open AI APIs:

The OpenAI opportunity extends beyond Microsoft’s installed base, which is an important change to Microsoft’s market position. This is because OpenAI APIs run on Azure even if the customer isn’t directly an Azure customer. Management commented on this in the earnings call:

“Second, even Azure OpenAI API customers are all new, and the workload conversations, whether it's B2C conversations in financial services or drug discovery on another side, these are all new workloads that we really were not in the game in the past, whereas we now are.”

Generative AI for Government:

One market that gets overlooked in terms of its AI impact is the Federal Government. It is currently undergoing a major shift into the cloud. In a blog post, the company CTO Bill Chappell wrote: "Microsoft continues to develop and advance cloud services to meet the full spectrum of government needs while complying with United States regulatory standards for classification and security. The latest of these tools, generative AI capabilities through Microsoft Azure OpenAI Service, can help government agencies improve efficiency, enhance productivity, and unlock new insights from their data. Many agencies require a higher level of security given the sensitivity of government data. Microsoft Azure Government provides the stringent security and compliance standards they need to meet government requirements for sensitive data."

Many years ago, I wrote about the Pentagon contract and why Microsoft would be a front runner when it was widely reported AWS was the sole Big 3 contender for the contract. This analysis pointed toward the long-standing history Microsoft has in being favored by government entities.

Microsoft CoPilot:

The company introduced Microsoft 365 Copilot last month. It is the productivity tool that combines large language models (LLMs) with the data in Microsoft Graph and Microsoft 365 apps. The use cases of Copilot in Word include giving the users the first draft while saving the time on sourcing, writing, and editing the content. Similarly, Copilot in PowerPoint will help to create presentations based on previous content. Copilot in Excel can analyze trends from the data, create charts, and helps to make informative decisions.

To have a suite of productivity products that can see an immediate impact from AI-related R&D is a large part of the $100 billion that Microsoft can potentially add to the top line by 2027.

Edge/Telecom Partnerships:

Another important driver is Microsoft’s close partnerships with many of the telecom and data centers around world which will further cement its strong position in edge computing.

In February, Microsoft announced it had previewed two AI-powered services that are designed to manage telecom networks. Jason Zander, executive vice president of strategic missions and technologies at Microsoft said, “What we’re doing is taking our native cloud work and making it specific to this telecom operator network space. I think a really great example of that is all the AI ops work that we are introducing into the system."

Microsoft Bing:

In the most recent quarter, Microsoft announced that the new AI-powered Bing and Edge has seen a positive response. The company crossed 100 million daily active users of Bing. This is how Microsoft described the early impact of ChatGPT.

“Of the millions of active users of the new Bing preview, it’s great to see that roughly one third are new to Bing. We see this appeal of the new Bing as a validation of our view that search is due for a reinvention and of the unique value proposition of combining Search + Answers + Chat + Creation in one experience.”

Notably, Microsoft Bing has 3% market share and for every additional 1%, Microsoft will make an additional $2 billion.

Microsoft is one of the largest cybersecurity companies

Microsoft’s cybersecurity segment reports more than $15 billion in revenue. The company was also the only Big 3 cloud vendor to not only build a multi-cloud product but also multi-cloud security. Today Microsoft’s cybersecurity sales dwarf the revenue of many cybersecurity best-of-breed products combined.

Source: I/O FUND

Installed customer base provides cross selling opportunities for new AI/ML based products and functionality

In the spring of 2022, I wrote about how reducing cloud costs was going to be a key trend in 2022 and beyond. We believed that Microsoft was uniquely positioned to benefit from this trend as it aggregates cloud services to help drive down costs. This is especially attractive for the Fortune 500 whereas startups, SMBs and mid-sized enterprises are likely to seek out and manage a larger portfolio of cloud services from various vendors.

Among the Big 3, Microsoft dominates the Fortune 500 with 95% running on Azure. Retaining the Fortune 500 in the migration to the cloud was accomplished through hybrid computing where Microsoft was first-to-market on serving a mix of on-premise, private and public clouds for their large enterprise customers. As the leader in on-premise systems, Microsoft was perfectly positioned to win with hybrid architectures. The company took this a step further and undercut other services on prices across its suite of software and platforms to win aggregate, long-term contracts.

Microsoft’s Risk is Valuation

Microsoft business model is low risk compared to many other AI stocks. However, there is certainly risk in the company’s valuation. The risk is compounded when market exuberance front runs a trend and overshoots the mark of what a company can realistically report in the coming years. Microsoft’s valuation is high relative to its 5-year median. If you look at the 5-year median prior to the current runup, the stock has a historic valuation of 9 PS Ratio and is currently trading at a 12 PS Ratio. Similarly, the 5-year median PE Ratio at the start of the year was 25 and the stock is currently trading at 36.

Source: YCHARTS

Conclusion:

AI will be a constantly evolving space and while many investors are rushing in at overstretched valuations, we prefer to be patient. Over time, we agree with the analyst that Microsoft’s competitive moat has positioned it to monetize the AI opportunity, much like with Azure and Microsoft 360, across its business lines so that its revenue will increase by $100B in the medium-term.

Microsoft is a real-deal AI stock and the increase in valuation has clearly factored in some of this. However, our updated sum-of-the parts analysis indicates there is still upside. Our current bull case price target is $440. As the story unfolds over the next few quarters, we see additional upside. However, in light of the strong rally from the Jan 2023 lows, we believe incorporating technical analysis to attempt to get the stock lower is important in determining optimal entry levels. In other words, the risk the stock sells off is much higher than usual right now. Sure, the stock price could continue to climb higher, but the world’s best investors favor being patient and buying when the market is in a state of fear rather than a state of greed. When we do add to our key positions, we issue real-time trade alerts. Learn more here.

Why It’s Too Late for Google Cloud to Overtake Microsoft Azure

Posted on December 7, 2020June 30, 2026 by io-fund

In our latest Forbes report, we discuss why Google (Alphabet) may have missed a critical window this year for the infrastructure piece. We also analyze how Microsoft directed all of its efforts to successfully close the wide lead by AWS. Lastly, we look at how all three companies will bring the battle to the edge in an effort to maintain market share in this secular and fiercely competitive category.

Google Cloud grew two percentage points from 5% to 7% since 2018 while Azure grew four percentage points from 15% to 19% in the same period. In the past year, Google Cloud saw a 1% gain compared to Azure’s 2% gain, according to Canalys.

Azure is under Intelligent Cloud but the company does break down the growth rate which was 48%. Although Google Cloud Is not specifically broken down, the Google Cloud segment grew 45% year-over-year compared to Microsoft Azure up 48% year-over-year.

Amazon Web Services is growing at 29%, which is substantial considering the law of large numbers. In the past two quarters, Google Cloud reported 43% year-over-year growth and 52% in the quarter before that. Microsoft has seen a slightly less deceleration from 51% and this is down from the 80%-range almost two years ago.

The key thing here is that when Microsoft held the percentage of market share that GCP currently holds, Azure was growing in the 80-90% range. This is the range we should be seeing from Google Cloud if the company expects to catch up to Azure.

In 2020, the term “digital transformation” has become a buzzword with cloud companies seeing up to six years of acceleration. Nvidia is a bellwether for this with triple-digit growth in the data center segment in both Q2 and Q3. Despite this catalyst, Google has lagged the category in Q2 and Q3 in terms of both growth and percentage share of market. If there were any year that Google Cloud could pull ahead, it should have been this year.

Alphabet has emphasized that GCP is a priority and the company will be “aggressively investing” in the necessary capex. However, the window of opportunity was wide open this year and aggressive investments would ideally have been allocated during the years of 2017-2018 to stave off Azure’s high-growth years with 80-90%.

This analysis is about the infrastructure, not software. Perhaps there will be a catalyst in the future for Google Cloud to take more share but the strategy is not evident at this time.

Read the full article on Forbes

Playing Defense With Cloud Software Stocks

Posted on June 4, 2020June 30, 2026 by io-fund

This article was originally published on Forbes on May 27, 2020,06:47pm EDTForbes on May 27, 2020,06:47pm EDT

The main risk to cloud software during a less-than-ideal economy is downgrades and churn. Signing new customers can also be a challenge. How a company is faring will often show up in net retention rates. My guess is we will see some cloud software companies remove this metric from their Q2 earnings report or we will see previously strong net retention rates dip below the ideal thresh-hold of 100% to 106%.

Net dollar retention rate is a key metric in software-as-a-service (SaaS) that has generated a lot of buzz over the past ten years or so. This is because it helps to predict cash efficiency for subscription-based models by calculating the inflows of revenue and upgrades minus the outflows of downgrades and churn. The benchmark that SaaS companies are shooting for is between 100%-106%. Exceptional companies report above 120%. Sammy Abdullah did a great write-up of this in Crunchbase.

Key metrics like net dollar retention rate come from venture capital deals where the goal is to exit through the public markets or through an acquisition. This key metric is helpful to consider but it also fizzles out over time. Venture capitalists are less concerned with the long-term growth of a company as they have already exited by the time subscriptions see serious churn.

Box is a great example for this as the company has been on the public market longer than most cloud software companies (although still a relatively short time of five years). Despite having an ideal net retention rate, the company’s revenue growth has declined. Box also had sales and marketing costs at 40-50% of revenue, which I’ll discuss in greater detail in my next article.

2U previously held the record for net retention at 144%. Revenue peaked at 44% year-over-growth in 2019 and now stands at 39.5% year-over-year growth. The stock price has correlated with this growth and the company is trading well beneath all-time highs of $98 with a current price of $35.

Slack has a net retention rate of 143% and Zoom Video has a net retention rate of 140%. These two may be outliers this year as the work-from-home trend will help sustain both existing and new subscriptions.

YCHARTS

Recently I published on whether we would see another dot-com crash considering the high valuations in tech despite a questionable economic backdrop. The main takeaway is that tech has many outliers in both revenue and earnings growth when compared to other industries. However, there is an imbalance in the number of cloud software companies on the market as venture capitalists have pushed for exits in recent years.

The glut in supply will be tested by startup closures and the lack of venture funding in the Series A and Series B stage as the two ecosystems are closely intertwined. This imbalance across the board is more important than focusing on the valuation of any one company.

When I speak of the glut of inventory, I am referencing the three-fold increase in competitors from an average of 2.6 competitors per company five years ago to 9.7 competitors per company today. Companies with more than 250 employees use an average of 124 SaaS applications, while companies with up to 10 employees use an average of 26 SaaS applications.

Cloud software will be more resilient than many other categories. But there will be some cloud software companies that see an impact on one side of the equation or both sides of the equation – this means either fewer new customers new customers or more churn or downgrades in existing customers more churn or downgrades in existing customers or both.both. There are three points where weakness can occur. Notably, companies that have annual recurring revenue will be more protected.

What we know is that the economy is not as strong this year as it has been in previous years. Some will argue the market is not the economy (which is true), however, cloud software can’t stop the spiraling effects of lower IT/cloud spending and tighter budgets that follow a weaker economy. One area that companies might reduce costs is to trim down on the number of cloud software and tools they use. Unemployment could exacerbate this if the subscriptions are paid per employee.

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Lower net retention rates eventually happen to roughly half of the software companies that are on the market for three years but covid-19 may speed this up or cause churn in otherwise strong subscription models.

Before the coronavirus, I championed cloud software at their low point in September of 2019. It seems like a distant memory now but Zoom, Twilio, Okta and MongoDB were down roughly 30% in a very short time span of one week over no major news or negative catalyst. My article’s subtitle stated, “Investors have dumped cloud stocks, which could prove to be a costly mistake” — this could not have been more accurate as cloud software led the rally off the March lows with some stocks up nearly 200% in one month. I was firm during the value rotation that these stocks would out-perform and I expanded on this as one of my top tech trends in 2020.

Considering we are at all-time highs and many gains have been clocked, I think it’s the perfect time to identify the indicators that might help determine if a company will be resilient post-covid. This was very important when the market showed signs of indiscriminate selling and is also important now when we’ve seen indiscriminate buying.

I consider this rally indiscriminate because many companies have withdrawn guidance. There is less information than usual to determine forward growth and valuations. Yet, we have seen massive upward moves based off very little information. With that said, many investors are feeling quite reassured right now as it’s been hard to not make stellar gains in cloud software no matter what company you picked.

I don't think the broad category of cloud software will end the year as strong as it began the year as the market will begin to see cracks in the three weak points mentioned. There will, of course, be many exceptions – this is commentary on the broader category of cloud software.

Conclusion:

Value investors like to focus on valuations as an indication for a bubble, especially since their objective is to find cheap companies. This works in some industries but it does not work in tech. This is because some of the most expensive tech companies are also the top performers with insatiable addressable markets.

Of course, what you want to avoid (at all costs) is a hypergrowth company that fails to report the expected growth rate. The market is a game of musical chairs, especially now that machines are driving the majority of the market. The only way to win at this game without having a team of Python software developers is to either be “early in and early out” or to be “early in and never get out.”

Paul Tudor Jones is one of many money managers who believe having a great defense is more important than having a great offense. This means you should have a mindset of protecting your money rather than making money. In some cases, net retention rates will become accelerated this year. For those that don’t accelerate, I will be favoring a strong defense.

Next week, I’ll be publishing on why the advent (and now maturing field) of growth marketing may contribute to a few surprise failures across cloud software.

Microsoft Stock Price: Technical Analysis

Posted on October 29, 2019June 30, 2026 by io-fund

Unlike most tech stocks, Microsoft’s stock price has over 30 years of trading action to analyze. With more data to analyze, I tend to lean heavier on Elliott Wave theory to predict Microsoft’s future. stock price because of the many layers of wave patterns that will naturally unfold over time.

This is a guest post provided by Technical Analyst, Knox Ridley

This article will lean exclusively on Technical Analysis as we start from a monthly chart and zoom into a daily chart to reach the conclusion that Microsoft’s stock price may have some upside left in the trend, but a sharp decline is in the near future, followed by a multi-year renewed uptrend.

Multi-Decade Picture of Microsoft’s Stock Price (monthly charts)

The red extensions are based off the length of Wave I, and then placed at the base of Wave II. The extensions are thus measurements of Wave 1 combined with the internal Fibonacci Ratios (outlined on the right of the chart).

Above is the monthly chart on Microsoft’s stock price going back to its IPO. We have a massive 5-wave pattern unfolding that perfectly aligns with Fibonacci ratios. The exact ratios we use on a daily chart are thus present on a monthly chart, and if you follow the ratio lines in red, you can easily see how the price reacts to these specific levels. It’s because of this that I lean on Elliott Wave as an estimation for the overall direction of Microsoft’s stock price, especially when we can analyze so many layers, and especially considering we are on the final leg of a 30 year 5-wave cycle.

Also Read : Why Microsoft (Not Amazon) Will Win the Pentagon Contract

The red extensions are based off the red cycle count that started at MICROSOFT’s IPO. The Fibonacci circles are based off the 3rd wave high and the 4th Wave low.

Not only can we use Fibonacci ratios to estimate support and resistance zones, but we can also use the same ratios to gauge the timing of an uptrend. I only use this technique on large trends, but as you can see above, Microsoft’s stock price tends to warp, bend and react to these levels, as well. In some instances, they act as strong resistance and support.

From my estimation, the price is coming to an inflection point between time and price. The price is moving closer to the 400% resistance circle in black, and is currently hovering between the red 350% and 338.2% price levels in red.

I’m expecting Microsoft’s stock price to make a distinct move within the coming weeks as we approach this inflection point. Either the price will turn down in a corrective fashion, or after bouncing around the resistance levels, we should see the price continue to the next level.

2009 Bull Market (weekly chart of stock price)

Each count has its own internal extensions, which match the color of the count. Red indicates the extensions of the large cycle count, blue represents the primary count off the 2009 low, and the orange represents the retrace level of 3rd wave within the primary count.

If we dive deeper into Microsoft’s price action on a weekly chart, we can see the uptrend from the 2009 low until now. Keep in mind, the large cycle uptrend that started from the IPO, which is highlighted in red, is composed of its own 5-wave structure. Since 2009, we have been in the final 5th wave of the red cycle count, and that count is comprised of the 5-wave primary count, which is highlighted in blue, circled numbers.

Also Read : Microsoft Earnings Likely to Prove Cloud Isn’t Slowing Down

My best estimation of this primary count has us pushing to the end of a 3rd wave and possibly just now entering the 4th wave correction. Third waves are typically accompanied by peak technical and is present in the MACD, which is another indicator that we may be close to topping. Also, the 3rd wave will typically reach the 161.8% extension. In this case, we have an extremely extended 3rd wave that reached the 223.6% extension as well as the top of the trend line in blue.

I’m expecting the 4th Wave to correct to the target zone I’ve highlighted in the green box eventually, which is between the $120 – $92 price range. Keep in mind, the $92 price range, though may seem extreme, but it is only the 23.6% retrace level.

It’s worth noting the big picture ahead of us, and the inevitable downside we will face. However, it’s also worth noting that this could take months to play out before we hit a final bottom in the 4th wave drawdown. In the mean-time, I believe the daily chart offers some clues to the short-term direction of Microsoft’s stock price.

If we zoom-in further using the daily chart, we are looking at the final push of the 5th Wave of the 2009 uptrend. What’s worth noting is how well Microsoft has held up as the bulk of cloud stocks are experiencing significant drawdowns. That alone is a show of short-term strength, which should be noted.

Furthermore, Microsoft is trading into an upward sloping triangle pattern, which is highlighted in blue. Price has virtually been rangebound, sloping upwards in a narrowing band. Notice how the RSI has been moving in its own triangle pattern. When I see this, it tells me that the RSI is resetting for the next move higher. The internals are coiling, building up strength, while price is staying stable.

Seeing consolidation of both the price and RSI at all-time highs is bullish, in the near term. Today, Microsoft gaped through the upward resistance, making all new highs, which means we will likely see a continuation of the extension to new highs.

However, if we close below the $128.5 support region, I expect the 4th wave correction to be in effect. If we break to the upside, and close above the $146. 50 region, I expect the bull market in Microsoft to resume as we extend further in this 3rd Wave push.

Also Read : Here’s Why Microsoft Stock Could Overtake Amazon on Cloud Infrastructure

Conclusion

Cloud is priced for perfection, even after a large rotation out of the sector that is still in progress. Microsoft’s earnings and short term technicals show that the price probable will extend further, extending the 3rd wave push of the primary count off the 2009 lows. If you want to play the long side, I would place a stop just under the $128.50 support region, and consider that the time to invest for the long haul is not at current prices.

This market environment is about playing momentum with tight stops. Even though the long-term analysis is showing a pullback in the future, there is still some opportunity to ride the remainder of this bull market with momentum, as Microsoft leads the way.

The big picture is to capture the final 5th Wave push after the 4th Wave correction takes place. When we bottom, Microsoft will be one of my core holdings as we get the final push of this 30-year cycle trend.