What Must Palantir Technologies Inc. (NASDAQ: PLTR) Prove in Q3?

What happened

Palantir Technologies Inc. (NASDAQ: PLTR) will report third-quarter results after the November 2 market close. To meet the midpoint of its own Q3 revenue guide, Palantir Technologies Inc. (NASDAQ: PLTR) must deliver $2.162 billion, 11.7% more than the second quarter.

That is only the first hurdle. If Palantir Technologies Inc. (NASDAQ: PLTR) hits the Q3 midpoint and keeps the $8.154 billion midpoint of full-year guidance, the company would still need about $2.424 billion of Q4 revenue. That is another 12.1% sequential increase.

Read more: Palantir Technologies (PLTR) stock analysis and investment case

Why it matters

The Q4 bridge is reproducible. Palantir Technologies Inc. (NASDAQ: PLTR) reported $3.568047 billion of first-half revenue. Subtracting that amount and the $2.162 billion Q3 midpoint from the $8.154 billion full-year midpoint leaves $2.423953 billion for Q4.

Profitability matters too. Palantir Technologies Inc. (NASDAQ: PLTR) guided to $1.292 billion to $1.296 billion of Q3 adjusted income from operations. The $1.294 billion midpoint divided by the revenue midpoint implies a 59.9% adjusted operating margin, below the 62% reported for Q2 but still unusually high for a company growing at this rate.

The operating baseline is strong. Q2 revenue for Palantir Technologies Inc. (NASDAQ: PLTR) grew 93% from a year earlier, U.S. commercial revenue grew 149%, and the company closed 220 deals worth at least $1 million. Those figures support the growth case, but they do not guarantee that the remaining full-year bridge will be cleared.

The strongest counterargument is that management may have set a beatable hurdle. Palantir Technologies Inc. (NASDAQ: PLTR) ended June with $9.2 billion of cash, cash equivalents and short-term U.S. Treasury securities, no outstanding debt, and a 62% Q2 adjusted operating margin.

Adjusted profit is not the whole story. Palantir Technologies Inc. (NASDAQ: PLTR) recorded $265.209 million of stock-based compensation in Q2, equal to 13.7% of revenue. The November report therefore needs to show both adjusted operating leverage and the GAAP cost of producing it.

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What's next

The next evidence is Q3 revenue relative to $2.162 billion, adjusted and GAAP operating margin, stock-based compensation, U.S. commercial and government growth, and any update to the full-year outlook. Those figures will show whether Palantir Technologies Inc. (NASDAQ: PLTR) is sustaining high-growth software economics or merely moving a difficult revenue hurdle into Q4.

The calculation assumes exact guidance midpoints. A different Q3 result or revised full-year range would change the implied Q4 requirement, so the bridge is a decision tool, not a forecast.

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Originally published on OptimistFi, evidence-first equity research. More at optimistfi.com.