I think it’s very telling that the first real content in Palantir’s (NYSE:PLTR) Q3 2020 earnings report was about one of its customers:

Justice Department Announces Global Resolution of Criminal and Civil Investigations with Opioid Manufacturer Purdue Pharma and Civil Settlement with Members of the Sackler Family (see: justice.gov)

If you take minute and head over to that press release, you see exactly zero reference to PLTR. Literally, you can Ctrl-F and search the page looking for “Palantir” and you will not find it. Nor will you find “Gotham” in that press release. Yet, you will see early in the earnings report that PLTR helped the United States Department of Justice. Let that mix in your mind, and sink in.

As I’ve explained in an important previous article, PLTR is a unique company for many reasons that are not appreciated. For example, PLTR is not a young company. It’s survived for 17 years. That’s very exciting to me because it gets me thinking about the Lindy Effect, which I explained previously. Let’s move on.

Here, in this Q3 2020 earnings report, we see another powerful strategy at work that is not appreciated. The company lets its customers take credit for its work, its technology and its engineering. If there is arrogance, it doesn’t let it get in the way. This is not trivial. Think of all those companies that insist on co-branding and taking credit. Also, think of all those people you know – like politicians – who are always looking for gratuitous photo opportunities.

In short, I will jokingly say that PLTR is happy to be the consigliere. There’s tremendous power being just behind the throne out of the limelight. Right up front, in the Q3 2020 earnings report, PLTR is showing the world how it plays the game; long-term, strategic, strong.

In the Q3 2020 earnings report – again, right up front – you will also see the World Food Programme, and its Nobel Peace Prize. This time, we’re talking about “Foundry” which is another PLTR product. In terms of optics, this is an intelligent presentation set-up. First, we’re looking at the Department of Justice, with strong government overtones. But then second, there’s a friendly pivot over to how it’s helping the poor and hungry.

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Beautiful positioning, smart marketing, right before our eyes.

Let’s pause for a minute. This breakdown alone is very much in line with my previous article. The essential lesson is that PLTR is poorly understood because the wrong analyses are used. Too many people are concerned with the exact numbers, as if 38% is bad, or 43% is good. Still others argue, whine and moan about how PLTR is a government contractor, or helps put kids in cages, or collects private data. The truth is nuanced. And look, if the X-Files taught us anything, it’s that The Truth Is Out There.

I’ll now pivot to some financial charts. They are clean and clear:

PLTR Q3 2020 RESULTSSource: PLTR Q3 2020 Earnings Report

As reported here on Seeking Alpha:

  • EPS of $0.0645 beats by $0.04
  • Revenue of $289.37M beats by $10.05M

Don’t blink, here’s the rub. Below the chart, we’ve got some bad news:

“Adjusted operating income (loss) and adjusted operating margin exclude stock-based compensation, employer taxes related to stock-based compensation, and expenses primarily related to the direct listing. Refer to the Appendix for reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures.”

Digging in, we find that PLTR is reporting a loss of over $853 million mostly due to $847 million in “compensation charges” related to its public listing. I went through PLTR’s Form 424B3 Registration (No. 333-248413) to learn more. It made my eyes burn and brain hurt, but the summary seems to be very simple…

PLTR needed to give early investors, management, and many others a lot of money. Importantly, it isn’t done, so this expense will not got to zero. Then again, nearly every company bleeds a bit due to stock options and related compensation, especially technology companies. So, we cannot ignore this going forward. It’s a real expense, perhaps even a red flag.

Moving forward through the Q3 2020 earnings report, there are several notable customer-oriented updates. Namely, we get a clear view of PLTR’s value proposition through short stories, links to video case studies, and raw numbers.

  • PLTR helped a customer generate $57 million of cash savings
  • One customer expects to generate $1 billion on an annualized basis
  • A top 5 pharmaceutical company is linking data from 2,000+ clinical trials
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Plus, PLTR mentions contracts:

  • Signed $300 million, five-year renewal with an aerospace customer
  • Signed a two-year, $91 million contract with U.S. Army Research Lab
  • Signed a $36 million contract to support NCATS efforts

So, there was some appropriate chest-thumping. I think this is smart marketing and rounds out investor thinking about PLTR. You get a feel for the customer base, but also the type of technology being used, how it impacts the whole world, and why the company makes money with the value it provides.

The financial section of the Q3 2020 earnings report was eye opening:

  • Revenue grew by 52% year over year in Q3 2020
  • Average revenue per customer was up 38% YoY
  • Adjusted operating income was $73 million
  • Adjusted operating margin was 25%
  • Revenue per customer grew while customer concentration decreased
  • The commercial business grew 35% year over year
  • The government business grew 68% year over year
  • Gross margin, excluding stock compensation, was 81% (vs. 70% in 2019)
  • The balance sheet holds ~$1.8B as of 30-September, 2020

But wait, there’s more. 2020 revenue guidance is over $1B, giving us a growth rate of 44%. And adjusted operating income is targeted for $133M.

Here’s the bigger picture:

We are expecting 31% revenue growth in Q4 2020, and year-over-year revenue growth to be greater than 30% through 2021.

So there you have it. Once you take out the stock-based compensation expense, PLTR is looking pretty. 2020 is shaping up strong, and 2021 looks to be on track for more growth. The day after, it’s clear. The market seems to like what it’s seeing:

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As I report on this, we’re now several hours into trading. PLTR is up 7%. I don’t have a crystal ball, so I don’t know if it’ll hold or not. But it’s very clear that PLTR isn’t collapsing, and it didn’t fail. Not getting killed is how you survive, then thrive.

That said, analysts do make me wonder. Here’s an example.

  • Seeing a balanced risk/reward at the current valuation, Morgan Stanley downgrades Palantir from Overweight to Equal-Weight but raises the price target from $13 to $15.
  • Analyst Keith Weiss does praise PLTR’s commercial revenue growth acceleration, solid new government contracts, and operating margin strength in the “solid first quarter out of the gate.”

That’s a head scratcher; downgrade but then raise price target. However, at the same time:

Jefferies analyst Brent Thill raised his share-price target to $18 from $13, affirming his buy rating.

Source: The Street

So, it depends. And analysts help make the world go round. But I’m not sure we’re going to get the best real view of PLTR from analysts who focus too much on the financials. I mean, it’s helpful to hear their reasoning, but the numbers thrown around don’t help me deeply understand the long-term value of PLTR. I think that’s where the retail investor – the Mom and Pop – can really get an unfair advantage.

To summarize, PLTR had a great quarter. I also think that its 2020 Q3 earnings report showcases its strengths, in blunt ways, but also through intelligent and subtle marketing. The only catch is the stock-based compensation expense, which I plan to watch very closely.

Disclosure: I am/we are long PLTR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Via SeekingAlpha.com