Palantir Q1 Preview: AIP Is Taking Off (NYSE:PLTR)

Investment Thesis

Heading into this earnings report, I believe Palantir (NYSE:PLTR) continues to represent a strong buy. In order to sell their Artificial Intelligence Platform (AIP) technology, PLTR has been running demo workshops for their potential clients. PLTR has ran over 560 AIP workshops across 465 organizations. Each workshop, if successful, delivers a price tag of around $1 million each.

These workshops typically last 10 hrs to 3 days and allow customers to learn firsthand how to utilize their new foundry technology to fit their needs. By allowing consumers to understand the application of AIP and how it could directly benefit them, I believe the demand for this product will drastically grow. As more companies utilize this new technology, I predict Palantir’s AIP product will undergo strong network effects, further accelerating adoption. In fact, the effects from these workshops can already be seen, helping boost the company’s commercial revenue streams to over $1 billion over the last twelve months​​.

Why Am I Doing Coverage?

Back in February most recently I covered Palantir and their possible inclusion in the S&P 500, but considering the coming earnings report on May 6th, I feel it is necessary to revisit this company. Since the last time I reported on them, Palantir has fallen 5.41%. Based on their developments in their AIP Foundry sector, and the implication of workshops, I am eager to hear what they have to report on.

Earnings Preview

I believe that Palantir Technologies (PLTR) is poised for continued growth, driven by the rapid adoption of their Artificial Intelligence Platform (AIP) and the increasing demand for their Foundry software. Analysts estimate Palantir’s revenue to grow by 17.61% year-over-year in Q1 2024, reaching $617.69 million, with an EPS consensus estimate of $0.08, representing a 52.24% growth from the previous year.

To recap from last quarter, the company’s Q4 2023 earnings call highlighted the accelerating momentum of AIP adoption, particularly in the US commercial sector, where revenue grew 70% year-over-year. CEO Alex Karp emphasized the company’s commitment to showcasing AIP’s capabilities through intensive “bootcamp” sessions (the workshops I mentioned above), where Palantir demonstrates the operational value of their software to prospective customers. So far this has shown to be successful for Palantir, as Ryan Taylor stated in the Q4 2023 earnings call:

We are deploying AIP to implement hundreds of real tangible use cases in production for our customers. One boot camp attendee remarked, “What your team did in just two days was incredible. We can already think of 100 use cases for this.” -Q4 earnings call

This approach is something that I haven’t seen much of from Palantir’s competitors, resulting in a surge of new customer acquisitions and expansions for the burgeoning technology giant.

To help power this, Palantir hosted their third AIPCon enterprise conference back in March, which allowed clients to showcase their successful implementation of AIP and Foundry. By doing so, PLTR was able to reveal their platform’s real-world impact. This level of customer engagement and transparency is rare in the industry, meaning that when a company does this, I believe it truly demonstrates their confidence behind their product.

For the upcoming earnings call, I will be looking for an even more widespread adoption of their AIP solutions, based on the success seen so far from these workshops and their customer conference. I will be looking for more examples (like on their last call) on how many customers actually have now signed up for or gone through an AIP pilot program. Last quarter the growth was powerful. I expect that trend to continue in this one as well.

AIP Makes Disciples of Software

I want to focus on their AIPCon conference in March, as I think this conference shows the heart of the new Palantir story (and why I think growth is set to accelerate). Like I mentioned below, this conference involved enterprise customers coming to Palantir and showing other potential Palantir customers how they can use the same software to power their business. I think this is incredible. It’s hard to get businesses to divulge their trade secrets and operating strategies. Yet, they see AIP as so powerful of a tool they want to boast about it. I think this strategy is something that is incredibly hard to pull off unless the product is truly game changing. By creating a space for current users to discuss their own experiences of the AIP technology, Palantir pretty much creates the best advertising they could dream of.

This conference not only appeals to Palantir from a marketing perspective, but also has an excess demand coming from potential clients. Their most recent conference was oversubscribed, so much so that they created a waitlist and a live-stream featured on their YouTube channel. As stated in the Q4 earnings call:

…we’re limiting the number of people who come. It’s like a rock concert

-Q4 earnings call

This excess demand extends to their bootcamps as well. Not only is this occurring at the conferences run by Palantir, but their clients have begun running their own AIP Bootcamps for new possible Palantir clients. Wow. Let me emphasize that again:

Customers of Palantir are promoting their software to other potential customers. They would only do this (I believe) if they thought AIP was life changing for the companies. That’s why I call them disciples.

Valuation

Since I covered Palantir in February of this year, most of my valuation analysis has remained the same. To review, in my previous article, I discussed how I believe diving into the healthcare sector will be the driving force behind PLTR’s inclusion in the S&P 500 this year. I mentioned how there is about $1trillion of opportunity in the Generative AI healthcare sector, and if PLTR was able to capture 1% of this ($10 billion), their market cap upside would be sitting at about $28.30 billion (10 billion times a sector median price to sales multiple at the time of 2.83), thus leading to about a 53% share price increase. Looking even farther back, in November I wrote another piece on Palantir covering the collaboration with NATO defense, to which I estimated the marginal market cap gain opportunity from that to be about $52 billion.

Why is this important?

My previous valuations are examples of just some of the markets Palantir is able to capture through their new AI technologies. Based on the approach discussed in this article, if continued, their AIP workshops could dramatically grow their client base, including companies in markets like healthcare, which possess a great amount of potential revenue gain.

Now looking at AIP more specifically, in the most recent earnings call, PLTR stated that they have conducted 560 AIP workshops across 465 organizations. Comparing this to the Q3 earnings call, the number of organizations they have conducted workshops for has grown by 325 from 140 to 465. If growth were to plateau from here they would be conducting workshops for 1860 organizations annually (465/quarter). But, assuming they do more pilots per quarter than the quarter before that (keep in mind they have AIP disciples now so I think there is a chance for exponential spread) I think there could be around 3250 companies that could get an AIP demo this fiscal year alone.

As mentioned in the Q4 earnings call, PLTR in Q4 alone has closed 103 deals over $1 million (Alex Karp has pegged previous AIP engagements at $1 million each). Using this math, out of the 465 organizations they have worked with, there was an approximate success rate of about 24%.

Assuming this close rate also remains constant, PLTR will close 780 unaccounted deals in the coming year (24% of 3250), adding up to $780 million in additional revenue.

Assuming these growth rates hold true, and applying these numbers to the current Price to sale multiple (FWD) of 18.38, I believe the marginal increase in market cap could be a little over $14.34 billion, or 29.11% marginal upside from here just on AIP opportunities.

However, as I mentioned in my follow-up coverage section, Palantir stock has not yet priced-in what I believe to be the other opportunities they have. Taking into account my predicted marginal increase in market cap from these AIP workshops, along with the market cap from my previous articles on Palantir, I believe their total market cap is estimated to be a little under $95 billion or about 92% upside from here.

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Why I Think This Is Not Priced In

Palantir first introduced AIP mid-way through 2023, and the bootcamps/workshops weren’t implemented until later that year. This means that the concept of AIP bootcamps is still fairly new.

When looking at Palantir’s Market PEG Non-GAAP (FWD) value, it sits at 1.52, which is considerably lower than the sector median of 1.85. This indicates that despite the growing popularity of their AIP technology, the market is under-appreciating Palantir’s opportunity for growth because the Price to earnings growth ratio is below average. This opportunity for growth was addressed during the Q4 2024 earnings call by Ryan Taylor, as he stated:

AIP and bootcamps are accelerating our business, particularly in US commercial, where fourth quarter revenue grew 70% year-over-year, evidencing a significantly expanding addressable Market -Q4 Call

Despite the statements made by Palantir executives and the growth in AIP bootcamps, the market doesn’t even view Palantir as an average company, it views them as below average on a PEG ratio. Considering the progress made in the last year I think this is an underestimate of the company’s future.

Risk To Thesis

With the widespread production and adoption of AI solutions we are all seeing, many are calling this an AI boom. Because of the rapid increase in AI innovation and adoption, an article by the Washington Post warns that this may slow down and companies are getting ahead of themselves. This concern applies to Palantir AIP technology. While this could be the case in the future for Palantir directly, I do not see this being an issue in the near future.

Just last week, Microsoft CFO Amy Hood stated that their customers were requesting more cloud space for their AI technologies, but they were struggling to provide this. This excess demand indicates that companies are still utilizing AI solutions at an accelerating rate. If the AI boom was coming to a close, this increasing demand for innovation and AI adoption would not be seen.

Bottom Line

As we approach Palantir’s upcoming earnings report on May 6th after the bell, taking into account their progress and strategic initiatives, I believe they have themselves up to continue as a strong buy. The deployment of their Artificial Intelligence Platform (AIP) and their “bootcamp” workshops have greatly contributed to their revenue growth. These workshops have allowed clients to understand how this technology works and how it can be directly beneficial to them.

Given the company’s recent performance, the potential rewards of investing in Palantir more than justify the associated risks due to the consistent growth in AIP workshop engagement and their closing rate. Despite their recent underperformance and the fear of the AI boom coming to an end, I feel confident Palantir has a promising future ahead.