Bank of America Really Likes Palantir

Taking a look at the bank's bullish stance on Palantir

Welcome back to DailyPalantir! On today’s newsletter, we’ll be going through Bank of America’s latest assessment on Palantir and why they are so bullish on the company going into the second half of 2024. Let’s get into it!

Bank of America’s Latest Report

I’ll attach the report below and then give my thoughts:

Alright, let's dive into the Bank of America report on Palantir.

This report is significant as it lays out Bank of America's expectations for Palantir in the second half of the year, after the company saw a strong first six months with a 50% increase in its stock price.

Today, Palantir touched $26 and got as high as $26.43:

AI Momentum

The core of the report focuses on the disruptive potential of AI, and how Palantir stands to benefit significantly from this trend. Bank of America sees Palantir as well-positioned to capitalize on AI integration, especially within the defense sector. They highlighted the company’s recent wins, including non-competitive deals like Project Maven, and noted the critical role Palantir is playing in defense AI.

The report also touched on Palantir's commercial momentum, particularly from their AIP boot camps. While the initial sales volume from these boot camps has been modest, the expectation is that conversion rates will increase over time. With over 900 organizations participating in these boot camps, the potential for growth is substantial. Bank of America anticipates that as these new customers convert, Palantir’s revenue growth will accelerate.

An interesting point in the report was the potential inclusion of Palantir in the S&P 500 Index by September. This could attract more institutional investors, both passive and active, reducing stock volatility and adding further upward pressure on the stock price. Such an inclusion would be a significant milestone, enhancing Palantir's visibility and credibility in the market.

The report emphasizes that Palantir is operating in a strong demand environment, driven by ongoing disruptions in supply chains, labor constraints, and the need for integrating legacy systems with new technologies. These challenges create opportunities for Palantir to offer solutions that can streamline operations and enhance efficiency for various industries. As more organizations recognize the value of Palantir's platforms, the commercial growth is anticipated to accelerate.

Go To Market Strategy Working

One key aspect highlighted is the broad participation in Palantir's boot camps. With over 900 organizations involved as of early May, the potential for conversion into paying customers is substantial. This is especially important as Palantir approaches the eight-month mark since the launch of AIP boot camps, a typical sales cycle period. The expectation is that meaningful conversions will start to materialize, contributing significantly to Palantir's commercial revenue.

Additionally, the report notes that Palantir is expanding its sales channels through joint ventures, platform partnerships with industry consultants, and further penetration within existing customers. We know some partners include Accenture and PWC. These initiatives are designed to enhance Palantir's market reach and drive growth. By collaborating with key industry players and building applications on top of Palantir’s products, the company is poised to capture more market share and increase its commercial footprint.

Palantir has a premium, but it’s warranted

The report also highlighted Palantir’s strong free cash flow position, which they expect to be around $800 million to $1 billion this year. This financial strength supports Bank of America's $28 price target, suggesting that despite the stock’s premium, it remains undervalued when considering its free cash flow projections. This financial health underpins the bullish sentiment and offers a solid foundation for future growth. This picture from the report showcases how BofA makes sense of the valuation:

Although Palantir is on the premium side of EV/sales/Growth for the expected next 12 months, they are undervalued when you look at their free cash flow. The ability for them to grow margins (adjusted operating margins went up last Q to 36%) continues to prove that FCF margins can also go up, leading to overall multiple expansion even if the stock is getting a premium right now.

Defense

Bank of America highlights Palantir's significant strides in becoming a key player in this space, especially noting its recent non-competitive deals like Project Maven and the Titan contract. These deals underscore Palantir's capability to meet the complex demands of defense AI, positioning it well for future growth in this sector.

The report emphasizes that 2024 is poised to be a landmark year for the Department of Defense (DoD) in terms of software and tech modernization, with Palantir at the forefront. The DoD's shift towards software-driven solutions and rapid tech adoption bodes well for Palantir, as it continues to secure pivotal contracts. This includes being named a prime contractor on hardware projects, a rare achievement for a software company, which further solidifies Palantir's standing in the defense ecosystem.

The report also points out the need for AI proliferation and democratization within the DoD and other highly regulated agencies, where Palantir is expected to play a crucial role. Given Palantir’s recent wins have been without any competition, it’s a very healthy sign that they can continue to win more high level contracts. The company’s platforms provide a robust data infrastructure that can be rapidly and securely integrated into various applications and technologies. The Army, Military, Airforce, etc. all can benefit from these types of applications.

This capability is crucial for the DoD as it seeks to modernize and enhance its operations with AI-driven insights and efficiencies. Again, if there aren’t many companies that can do this, Palantir will be the winner of these contracts and get a premium from the market for that.

Technicals

On the technical side, Bank of America is bullish. They pointed out that Palantir's stock remains within a bullish trend, with strong support levels at $22, $21, and $20. They believe the stock has the potential to move towards $30, backed by these strong technical foundations. A break above the recent high of $26.57 would be strong, and a break above the 52 week high of $27.50 would be very strong. Increased guidance in Q2 potentially could get us there.

Top 9 Stocks

Bank of America has added Palantir as one of their top 9 picks for going long on in Q3:

While BofA covers hundreds of stocks, it’s nice to see them decide that Palantir is prime to be one of the core 9 picks going into the latter half of the year because of AI and defense being tailwinds for the overall business and trajectory of growth.

Second half of the year begins…

That’s it for today - see you tomorrow!

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