


Palantir: Beating down short sellers, the unattainable "AI faith"

$Palantir Tech(PLTR.US) released its Q4 2024 earnings after the market closed on February 3rd, Eastern Time. While giants are still caught in the debate over whether significant investment in large models is worthwhile under the disruption of Deepseek, Palantir once again proves through its Q4 financial report that doing well in specific vertical AI applications can also yield great results!
Key information from the earnings report:
1. Bright guidance, countering doubts: For Palantir, which has a visibly high valuation, the only thing that could extinguish the short-term upward momentum is a significantly slowed or disappointing growth forecast. Why is the guidance from PLTR's management so important? The reason lies in two major obstacles: "the market's inadequate understanding of the early-stage AIP business" + "the inability to boldly quantify the customized services."
In other words, in the current competitive landscape with few rivals, how much Palantir can grow in the short term largely depends on its own customer acquisition pace, which is the intensity of team expansion (sales connections, customized solution connections, etc.). This leads to a discrepancy between market expectations and actual performance, with the market relying on guidance to make assumptions.
Before the earnings report was released, bullish views need not be elaborated, while bears had some doubts about the sustainability of high growth and the pace of profit improvement in 2025 (U.S. government defense spending peaking in the short term, competition from OpenAI and AI-enabled enterprise SaaS platforms). Although bears also acknowledge that there will still be decent growth in the short term, compared to the current valuation sentiment, a price correction may be needed to digest it.
The guidance provided by the management in the quarterly report directly countered the bears' doubts regarding Q1 2025 and the full year:
(1) Growth not slowing: Q1 growth is expected to be 36%, slightly exceeding market expectations. Full-year revenue is projected to be between $3.74 billion and $3.76 billion, with a growth median of 30%, and U.S. commercial revenue growth is expected to increase by at least 54%!
(2) Continuous profit improvement: Q1 adjusted operating profit margin is expected to be 41%, nearly 4 percentage points above market expectations. The full-year profit margin median is 42%, continuing to improve by 3 percentage points compared to 2024.
2. Strong current performance: In addition to the guidance, the performance in Q4 itself was also impressive. In the U.S. market, which supports revenue, both government and commercial revenues accelerated, benefiting from strong demand for Foundry and AIP. The international market saw some recovery in government clients, stemming from new contracts with defense departments in countries like the UK and Australia. Revenue from international enterprise clients remained flat, with no significant changes for now.
The number of customers also indicates that Palantir's customer base grew significantly in Q4, far exceeding the performance of the previous three quarters. Among them, the net increase in enterprise clients doubled, while the revenue expansion rate (NDR) for existing clients further increased to 120%3. Leading indicators reflect short-term growth is also worry-free: Palantir mainly provides customized software services to clients (the AIP part shows a trend towards standardization), so revenue is relatively predictable in the short term. The company's guidance range is also quite narrow, implying a high degree of revenue certainty.
However, for this reason, to reflect Palantir's true business growth situation, the market pays more attention to indicators related to new contracts, such as TCV (Total Contract Value), RPO (Remaining Performance Obligations), number of customers (mainly commercial customers), and Billings (current billing flow).
(1) The first three (TCV, RPO, number of customers) involve the impact of different cooperation cycles on revenue fluctuations, thus being more helpful for medium to long-term growth outlook: In the fourth quarter, RPO maintained a 40% growth despite a high base. However, looking at the segmentation of long-term and short-term contracts, the net increase in medium to long-term contracts of over one year has significantly slowed compared to Q3, which needs to be monitored to see if it is merely a holiday season effect.
TCV returned to accelerate growth at 56%, while RPO showed a slowdown in net increases of medium to long-term contracts, which seems contradictory to the accelerated expansion of long-term contracts reflected by TCV. The statistical difference mainly lies in whether the client has clear invoicing (i.e., whether it is revocable). The accelerated growth of TCV reflects that Palantir has indeed many new long-term cooperation intentions, but some may be strategic partnerships or demands that cannot be confirmed in the short to medium term. However, this portion of the contract value is expected to convert into effective orders as clients' product experiences in Bootcamp continue to improve.
(2) In the short term, the market mainly focuses on Billings changes: In the fourth quarter, Billings grew by 29% year-on-year, but due to a high base (AIP had just started to be released and received effective feedback), there was a natural slowdown quarter-on-quarter. However, deferred revenue continued to weaken, declining by 48 million quarter-on-quarter, mainly reflecting that the newly invoiced and collected contract value may not be high. But if combined with the not-so-bad RPO data, it indicates that a larger proportion of the new contracts currently do not have clear prepayments/deposits.
However, Dolphin 君 compared historical situations and found that similar fluctuations occurred in the fourth quarter, so it speculates that the error here may be related to year-end corporate payments affected by holidays.
4. Controlled expense expansion: Last quarter, Dolphin 君 predicted that Palantir would start to increase expenses and investments. In the fourth quarter, although some increases were made, the overall control was maintained, especially compared to the revenue expansion rate. The growth of expenses under GAAP mainly comes from employee stock-based compensation (SBC), but this is influenced by the market value doubling. In terms of the growth in the number of options granted, the human scale should only be moderately expanded.
Excluding SBC, looking at other expense situations, the gross margin slightly increased by 1 percentage point quarter-on-quarter, while operating expenses mainly grew by 15%, accelerating compared to 7% in the previous quarter, but overall still considered controllable.
Therefore, Q4 achieved an adjusted operating profit of 370 million USD, accelerating growth by 45% year-on-year, with the profit margin further increasing to 45%5. Performance Indicators Overview
Dolphin's Viewpoint
In the case of Palantir's trading, the influence of short-term fundamentals and non-fundamental factors is almost fifty-fifty. The impressive rise before the earnings report was aided by its inclusion in the Nasdaq 100 index and frequent interactions and collaborations between the CEO and Musk. However, strong fundamentals are the cornerstone of the rise, as Palantir secured multiple medium to long-term orders in the defense sector in Q4. Overall, the increasing valuation of Palantir is inseparable from the gradually opened growth outlook expectations, and in the short term (at least from a six-month perspective), Palantir's strength still has sustainability.
But compared to its peers, Palantir's valuation is undoubtedly the highest (from the perspective of EV/FCF/Growth). It is worth considering, aside from horizontal comparisons, purely from Palantir's perspective, how long will the valuation increase continue? Or in other words, under what circumstances might Palantir's "bubble" be burst?
Dolphin believes that the key point lies in grasping the turning point of competition, especially in the commercial market.
In the short term, Palantir's strength can continue to beat guidance and expectations, and although there are external factors from the AI industry's own development, it is more due to Palantir's internal strength being so powerful that "there are no competitors in sight."
The competitive advantage here is not only reflected in Palantir's robust technology but also in the ecosystem of relationships it has built and the product experience advantages brought to customers by end-to-end services in the early stages of AI development, which are equally noteworthy:
1) Palantir's ecosystem of relationships is strong. The network at the level of the U.S. government goes without saying, as it is one of the important reasons for Palantir's rapid rise in its early days. Currently, with the help of Peter Thiel, even the Trump administration and Musk's connections, Palantir has further solidified this network. This has even led potential competitors to choose to turn enemies into friends and form alliances with Palantir to jointly undertake orders from the Department of Defense.
2) Palantir's product customization leads to limited scale expansion effects, which is one of the main reasons for market criticism. However, at present, this may instead become a relative advantage: the almost end-to-end customized product service allows enterprise customers (especially those in traditional industries) in the early stages of AI application to have a more comfortable user experience. But this also has logical flaws, as with the increasing prevalence of AI applications, the rising acceptance threshold for customers may weaken Palantir's significant service advantages.
Therefore, Palantir's competitive/valuation turning point lies in when the network of relationships shows cracks and when customers no longer need end-to-end services.The former is relatively difficult to make accurate predictions; we can only continuously track the possible "face-changing period" from the perspective of limited expansion space in government defense spending budgets. However, the turning point for the latter, Dolphin believes, may appear in as little as 1-2 years. This is more about the lowering of technical barriers for AI models and applications, allowing enterprise clients to establish basic data analysis and automated process management capabilities internally at low cost, shifting the demand for Palantir from end-to-end to focusing on high-end decision analysis and other technical capabilities, thereby weakening the currently still not low average revenue per customer (ARPC).
Of course, if ARPC decreases, Palantir can still win by acquiring more customers. However, in this case, as Palantir crosses into broader enterprise service markets beyond its advantageous areas, the necessary investment in channel building and customer acquisition costs will also need to expand simultaneously, which will affect profit margins.
Another hypothetical expectation is whether Palantir can seize the opportunity during the 1-2 year dividend period before the turning point arrives, leveraging the support of several big names behind it to step onto a larger stage ahead of others. We will wait and see.
The following is a detailed analysis
1. High Demand for AI Remains Strong
In the fourth quarter, total revenue reached $828 million, a year-on-year increase of 36%, exceeding market expectations (approximately $780 million), with growth continuing to accelerate compared to the previous quarter.
Palantir primarily provides customized software services to clients, so revenue is relatively predictable in the short term, and the company's guidance range is also quite narrow, implying a high degree of revenue certainty. However, exceeding the guidance upper limit for several consecutive quarters still reflects strong customer demand for AIP and Foundry.
1. Business Segment Performance
(1) Government revenue still contributes significantly: In Q4, government revenue grew by 40% year-on-year, continuing to accelerate, mainly driven by demand from the U.S. government. However, international government revenue is also showing signs of recovery, primarily from defense department orders in regions such as the UK and Australia.
With the support of the Trump administration and several big names, Palantir's relationship with the government, especially the Department of Defense, has become more solid, specifically reflected in Q4 by securing more medium- to long-term orders and additional cooperation periods for existing orders.
For example, in September, Palantir signed a five-year contract with the DEVCOM Army Research Laboratory (ARL) to expand access to the Maven intelligent system to include all branches of the military, such as the Army, Air Force, Space Force, and Navy.
In December, Palantir announced an extension of its long-term partnership with the U.S. Army to provide Army Vantage capabilities to support the Army Data Platform (ADP). The total value of the four-year contract is over $400 million, with a total contract ceiling of $620 millionIn December, Palantir announced the formation of an alliance with defense technology suppliers such as Oracle, AWS, and L3Harris to expand cooperation channels.
As of February 3rd (Eastern Time), the confirmed new performance contracts for the first quarter of 2025 are still limited, possibly due to seasonal fluctuations caused by the Christmas holiday.
(2) The commercial market is still driven by AI: In the fourth quarter, commercial revenue grew by 31% year-on-year, a decline compared to the second quarter, mainly due to the drag from international markets. The incremental growth in commercial revenue primarily comes from customer demand driven by AIP.
Although corporate clients participating in Bootcamp may not necessarily become actual customers of Palantir, AIP's use of the Bootcamp strategy has successfully compressed the overall customer conversion time (to 1-3 months), somewhat compensating for Palantir's scaling disadvantages.
After talking about AIP for more than a year, what are the technical advantages of AIP itself?
Dolphin believes that AIP further strengthens Palantir's original technical advantages in analyzing and processing unstructured data through AI and expands the applicable scope of the field. At the same time, it lowers the threshold and enhances some generality, which can also address the previously criticized issue of excessive product customization of Palantir.
The specific technical modules mainly include:
a. software-defined data integration: software-defined data integration
b. business ontology mapping: the ability to automatically map entities and relationships in the business ontology (including data entities and data relationships) from different data sources.
c. workflow orchestration: automating coordination and management of operations across multiple tasks, systems, or personnel. For example, managing cross-departmental collaboration between supply chain and finance departments, automating to reduce manual operations, improve efficiency, and lower labor costsd. write-back capabilities (reverse ETL): The ability to write data back, transferring data from the analytics platform to the business system, implementing the final analysis results into practical operations. It supports real-time decision-making and operations, enhancing operational efficiency.
e. software development lifecycle management (Apollo): Software development lifecycle management
II. Contract Situation: Is Net Increase Slowing Down?
For software companies, future growth potential is the core of valuation. However, the revenue confirmed each quarter is a lagging indicator, so we recommend focusing on the acquisition of new contracts, primarily reflected in contract status (RPO, TCV), current billing flow (Billings), and the increase in the number of customers.
(1) Remaining irrevocable unfulfilled contracts (RPO): The new amount of medium to long-term contracts has decreased
In the fourth quarter, Palantir's remaining contract amount was $1.73 billion, an increase of $160 million quarter-on-quarter, maintaining a 40% growth despite a high base.
However, the net increase in long-term contracts in the fourth quarter was lower than that of short-term contracts, and there was a noticeable slowdown compared to the previous quarter. This needs to be observed further to see if it is merely a holiday disturbance. From Dolphin's perspective, the increase in long-term contracts represents more genuine growth. The increase in short-term contracts may stem from the conversion of long-term contracts to short-term upon expiration, rather than being a clear demand from external sources.
(2) Current billing flow (Billings) & deferred revenue: Weakening, possibly due to holiday disturbances
In the fourth quarter, the billing flow was $780 million, a 29% year-on-year growth, with last year's AIP demand starting to ramp up, raising the base. The contracts billed during the period mainly reflect fluctuations in short-term demand (including parts of revenue already confirmed for the period). Although, considering historical situations, Dolphin believes that seasonal fluctuations do not indicate significant issues from a product competitiveness perspective. However, due to the inherently high valuation, the market will naturally be more stringent on performance, thus paying close attention to this indicator.
Indicators reflecting similar trends—deferred revenue continued to weaken in the fourth quarter, also indicating that the new contract amount for short-term invoicing may not be high. Since the company has already provided clear revenue guidance for the first quarter (short-term growth is guaranteed), to prevent seasonal effects from distorting judgment, Dolphin suggests continuing to observe. However, comparing with historical situations, similar fluctuations have occurred in the fourth quarter, so it is speculated that the error here may still be related to year-end corporate payments affected by holidays.
(3) Total Contract Value (TCV): Long-term cooperation willingness remains high, waiting for order conversion
In the fourth quarter, the newly recorded total contract value was 1.8 billion, a year-on-year increase of 57%, accelerating expansion on a high base.
The slowdown in net additions of medium- and long-term contracts shown by RPO contrasts with the accelerated expansion of long-term contracts reflected in TCV. The statistical difference mainly lies in whether the customer has clear invoicing (i.e., whether it is revocable). The accelerated growth of TCV reflects that Palantir's new long-term cooperation willingness is indeed quite high, but some may be strategic partnerships or demands that cannot be confirmed in the short to medium term. However, this portion of the contract value is expected to convert into effective orders as customers' product experiences in Bootcamp continue to improve.
(4) Customer Increment: Enterprise customers remain the main source of new additions
From the most intuitive customer count, which is also a medium- to long-term indicator, there was a net increase of 82 companies in the fourth quarter, of which 73 came from commercial customers and 9 from government agencies.
Combining <1-4>, Dolphin believes that current clients are still very interested in Palantir's products and have a high willingness to cooperate. However, due to holiday disruptions or rapid product changes, the short-term increase in confirmed effective orders has slightly weakened, but this does not indicate a change in Palantir's product advantages.
III. Moderate Expansion of Costs and Expenses
In the fourth quarter, Palantir achieved a GAAP operating profit of 11 million, mainly due to the rapid increase in SBC expenses driven by the rising market value, which compressed profits. Excluding the impact of SBC expenses, the Non-GAAP operating profit reached 370 million, a year-on-year acceleration of 78%, with a profit margin increasing to 45%.
Last quarter, Dolphin predicted that the cost control period had passed. Although Palantir did further increase spending in Q4 (excluding SBC), the growth rate increased from 7% in Q3 to 15% in Q4, which actually belongs to a moderate expansion. Therefore, it did not put too much pressure on the profit margin, continuing to rely on high revenue growth for improvementUnlike companies that invest in large models, Palantir tends to focus on applications, so capital expenditures on AI have remained relatively stable, with most of the real investments already confirmed in advance. Under the computational power transformation brought by Deepseek, application-side companies are expected to continue benefiting.
Dolphin Investment Research "Palantir" Historical Study:
Financial Reports
November 5, 2024 Conference Call “Capturing More Allies, What’s Different About Palantir’s AI? (3Q24 Conference Call)”
November 5, 2024 Financial Report Commentary “Palantir: The AI Faith Ticket Brings Hope Again”
August 6, 2024 Conference Call “Palantir: Our Success Lies in Building AI Products That Meet Real Needs (2Q24 Minutes)”
August 6, 2024 Financial Report Commentary “Palantir: Upgraded Guidance, Proving the Growth Story of AI”
May 7, 2024 Conference Call “Palantir: In the U.S., We Have No Direct Competitors (1Q24 Conference Call)”
May 7, 2024 Financial Report Commentary “Palantir: Surprising Expectations but Plummeting? The Market is More Selective Under High Valuation”
February 6, 2024 Conference Call “[The Core Driver of Growth is the Business Model Entering Through Training and Continuous Investment in Product Strength (Palantir 4Q23 Conference Call)](https://longportapp.cn/zh-CN/topics/11510366?app_id=longbridge)》
February 6, 2024 Financial Report Review: AI Drives a New Growth Cycle for Palantir
November 3, 2023 Financial Report Review: Palantir: Growth Rate Rebounds Against the Trend, Is AI the Hero Again?
In-depth
October 13, 2023: Palantir: What Supports Its High Valuation?
September 26, 2023: Palantir: The "Mysterious" Military Weapon Activated by AI
Risk Disclosure and Statement of This Article: Dolphin Investment Research Disclaimer and General Disclosure
The copyright of this article belongs to the original author/organization.
The views expressed herein are solely those of the author and do not reflect the stance of the platform. The content is intended for investment reference purposes only and shall not be considered as investment advice. Please contact us if you have any questions or suggestions regarding the content services provided by the platform.