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Palantir is closing the year with an astonishing +170% YTD performance.

Will this rally continue in 2024?

Investors are confident. Around 80% of the investors who answered my poll see the rally to continue in 2024.

I believe Palantir’s performance in 2024 should be primarily driven by three components:

Interest rates. A further drop in the 10y Treasury yield, now at 3.8%, would support performance for “long duration stocks” like Palantir.
S&P-500 inclusion. Palantir is now eligible so it should be included in the next rebalancing, occurring in March. The inclusion in the world's most important index is typically appreciated by investors and helps expand the investor base.
Revenue growth. Will growth finally reaccelerate?

Approaching the 30% goal

As we mentioned many times, Revenue Growth is the key driver affecting the performance of Saas companies: higher growth is rewarded with higher valuation multiples.

Palantir’s growth seems to have bottomed in 2023 as analysts estimate a rebound.

However, analysts estimate Palantir will grow at ~21%. These estimates are well below the long-term 30% CAGR and seem conservative to me.

Numerous factors should contribute to an acceleration of growth in the coming years and support a revision of analyst expectations:

AI market tailwind. Palantir is #1 ranked in the secular trend;
AIP Bootcamps made client acquisition 12x faster;
AI requires an ontology to deliver output. This stimulates demand for Foundry;
NHS contract contribution and its potential ripple effects in Europe;
Potential TITAN contract award and related Army digitalization efforts;
Expansion of Gov. Web Services to capitalize on the interest in defense tech;
Global defense spending increase driven by geopolitical tensions;
SPACs drag should reduce considerably in 2024.

A precious hint comes from Palantir itself:

Palantir guided for the second Revenue growth increase after a long series of declining growth rate.

It seems a new growth cycle has begun for Palantir.

Notice: differently from Palantir, the SaaS Median NTM growth has not rebounded yet. I consider this a positive signal the “unprecedented demand” signaled by CEO Alex Karp is real.

Chart from .

Analysts are skeptical

Interestingly, analysts’ expectations of 21% CAGR by 2025 are below the 23% AI Software Market expected growth, despite Palantir ranking #1 (IDC).

This means analysts imply Palantir would lose market share.

Analysts seem to underestimate the impact that the AI market will have on Palantir.

Given the considerations above, I expect to see a gradual acceleration that would lead to a 25-30% growth in the last quarters of 2024.

Palantir, currently at $18 per share, trades at 14x Revenues. If Revenue Growth accelerates to ~30% or above in the next year I believe Palantir's EV/Sales could expand to ~20x EV/Sales multiple. That would correspond to a ~66x FCF under a ~30% FCF Margin assumption.

In the table below you can see Palantir’s valuation ranges under the current analyst estimates. If Palantir’s growth supported a 20x multiple, it could exceed $25 per share. Easier said than done.

On the other end, if growth stayed around 20% I don’t believe there is much room for multiple expansion from the current 14x EV/Sales.

It’s all about growth.

2023 in review: the pivot

To truly appreciate how important this year has been for Palantir beyond the stock performance, I’ll share a quick recap of the key developments of 2023.

2023 biggest achievements:

GAAP Profitability achieved 2 years ahead of schedule.
AIP launch to capitalize on the AI revolution;
Restored investors’ confidence in the management.

Crucial deals on the Government side:

$420mn NHS Federated Data Platform. Palantir won this contract despite firm opposition from activists and negative press. Palantir’s solution must be 10x better than alternatives if the UK Government accepts the “political risk”;
$250mn JADC2 deal with the US Army. This contract shows how Palantir is at the center of the Army’s digitalization efforts;
Ukraine Reconstruction. Even though the size of the deal is not disclosed, this deal signals an appreciation and trust for Palantir from its contribution to the battleground. “For free” was a good investment.

Crucial deals on the Commercial side:

Sompo: the company is Palantir’s most important client in Japan and the key to facilitating regional sales. This expansion signals strong confidence in the relationship;
Cleveland Clinic: the extension with Cleveland and other key hospital operators (Tampa and HCA) signal Palantir’s strength in Healthcare;
Unicredit: the extension with this bank, which is the second most important bank in Italy and a client since 2018 signals that legacy companies need Palantir to transform themselves.

Relevant product launches:

AIP: this combined with the related Bootcamps is transforming Palantir’s go-to-market and making acquiring customers 12x faster;
Foundry Marketplace: Palantir is creating the basis for a broad B2B “App Store” to facilitate the sales of applications developed in Foundry;
FedStart: with this product, Palantir can truly act as the bridge between Commercial companies and the Government.

Important awards:

The center of everything good

2023 was exciting, but I believe the best has yet to come.

"Palantir seems to be at the center of almost everything good in the West." - Alex Karp, Palantir CEO

Yours,
Arny

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Disclaimer: The views and opinions expressed above are current as of the date of this document and are subject to change without notice. Materials referenced above will be provided for educational purposes only. None of the above will include investment advice, a recommendation or an offer to sell, or a solicitation of an offer to buy, any securities or investment products.

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