Palantir (New York Stock Exchange:PLTR) filed its third-quarter earnings card yesterday, causing the stock price to drop more than 11%. Year-to-date, Palantir shares have lost 61% of their value, in part due to expectations of slowing top-line growth. Although the client acquisition remained strong in the third quarter, Palantir has experienced a sharp slowdown in the commercial segment that has driven the company’s commercial performance in the last two quarters. With sentiment turning against Palantir in recent days and growth targets increasingly challenged, investors must unfortunately expect an extended slide for Palantir stock!
Q3’22 from Palantir
The software analytics company reported $0.01 per share in adjusted earnings for the third quarter compared to a forecast of $0.02 per share. On the revenue side, Palantir fared slightly better than forecast with actual results of $478 million compared to a consensus of $475 million.
Business segment challenges and slowing top-line growth
Palantir reported third-quarter revenue of $478 million, beating company guidance of $474-475 million and showing a 22% year-over-year growth rate. In Q2, Palantir grew revenue 26% year over year, so the company’s top-line growth unfortunately slowed. While it’s great that Palantir generated $3 million more in revenue than its peak forecast, the software analytics company grew at less than 30%…which is Palantir’s long-term revenue growth target.
A key issue that emerged in the third quarter is that revenue growth in the business segment, which drove all of Palantir’s business and financial performance in fiscal 2021 and fiscal 2022, slowed considerably. The commercial segment delivered 17% year-over-year revenue growth in the third quarter of 2022 compared to 46% in the second quarter of 22… and was the second consecutive quarter of slowdown in revenue for the commercial business of Palantir due to decreased demand for software analysis services. especially in Europe. Palantir’s commercial segment was actually outperformed again by its government segment in the third quarter, which saw 26% year-over-year gross revenue growth. I believe slowing growth is a significant risk to Palantir and especially to the company’s guidance for fiscal 2023.
Strong and continuous customer acquisition
Palantir continued to add a good number of new customers in the third quarter of 2022, however, on a net basis. The software company added 33 net new customers in the third quarter, bringing Palantir’s total number of customers to 337, showing an 11% increase quarter over quarter and a 66% increase year over year. Customer acquisition also remained strong in the commercial segment, which is where Palantir added 25 net new customers in the third quarter. Customer monetization of the top twenty customers improved as this group increased their platform spend from an average of $46 million in the second quarter to $48 million in the third quarter.
Free cash flow
Unfortunately, Palantir was once again disappointed with free cash flow. The software analytics company generated $36.6 million worth of free cash flow in the third quarter, showing a 69% year-over-year decline. My expectation for Palantir’s Q3 2022 free cash flow was $62 million, which the company far exceeded. For this reason and because business revenue growth is slowing dramatically, Palantir can only be a resource for me at this time.
Headwinds for Palantir valuation
Palantir’s valuation factor could come under further pressure due to headwinds in the business segment and more reluctant spending habits of business clients. Palantir is currently valued at a PS ratio of 6.1 X, based on an estimated revenue of $2.36 billion in fiscal 2023. With Palantir not yet profitable, there is also a considerable risk that investors will lose patience with the software company if Palantir fails. to generate profit soon. Earnings estimates have been trending lower overall as investors weigh the possibility of moderating growth next year.
Outlook for the fourth quarter of 2022
Palantir sees headwinds from USD strength in the current year, but nonetheless confirmed its headline forecast for FY2022: The software company continues to post $1.900-$1.902 billion in revenue, which is translates into a year-on-year growth rate of 23%. The projection implies that Palantir will grow 7 PP less than the company’s long-term average annual revenue growth target of 30%.
Risks with Palantir
The biggest risk to Palantir, as I see it, is that the software company grows at significantly slower growth rates in the commercial business where customers are cutting back on spending and a recession may accelerate this trend next year. Palantir has already lowered growth expectations for fiscal 2022 by lowering this year’s revenue growth target from 30% to 23% in the second quarter. Unfortunately, there is a risk that Palantir will also see weaker growth in gross revenue in fiscal 2023 if the economy slows and governments potentially cut spending as well.
Palantir’s earnings card for the third quarter of 2022 was another disappointment. Although the software company has improved its customer monetization and added new customers, Palantir’s business slowdown is something to worry about because the company may not achieve its 30% annual revenue growth target next year.
Palantir’s stock is largely evaluated by the company’s earnings growth prospects. Considering that Palantir’s revenue growth is slowing, the risk here is clearly that the stock goes into a prolonged decline… it’s already down over 11% yesterday and as much as I like Palantir, investors may become even more bearish on the company. Go ahead, especially if Palantir were to cut its FY2023 growth targets!