Palantir Technologies (PLTR) specializes in data analysis software. The bulk of its clients are government agencies, but the company is building an impressive commercial portfolio as well. Founded in 2003 by Peter Thiel, it held a direct listing of its stock at the end of last year. Palantir shares opened at $10 on their debut and finished trading just below their opening price, at $9.50.
Since debuting, PLTR has been on a tear, rising 148.8%. The rally makes sense. Its client base mainly consists of defense and intelligence agencies, which contribute to smooth recurring cash flow. In addition, the company’s business model is tech-heavy, which is always a positive in the current markets. However, Palantir’s close relationship with the defense establishment is a source of much controversy.
Palantir is also under fire due to its contracts with the U.S. Immigration and Customs Enforcement (ICE). According to an S1 filing, the total worth of the contacts is $92 million.
While these arguments could be valid, defense is a largely bipartisan issue. Based on the renewals, it is safe to say defense agencies have reposed their trust in the analytics company. Another aspect worth noting is Palantir’s commercial side. The company values its addressable commercial market at about $56 billion. Even if Palantir succeeds in gaining only a slice of the market, that will greatly help the bottom line.
The only negative is the valuation. Due to the stock’s astounding ascent, there is now a huge gap between valuation and the stock price. However, the long-term thesis remains solid for this one. Still, I am bearish on Palantir stock.
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Stock-Based Compensation Weighing Down Investor Sentiment
Palantir’s stock-based compensation expenses are very high. In 2020, the big data analytics company reported net losses of $1.17 billion. One of the main reasons is $1.27 billion in stock-based compensation expenses. Stock-based compensation expenses are significantly dragging down the company’s profitability and pushing its time until break-even further into the future.
Investors are also in a state of confusion regarding the future. Palantir has not issued any guidance on stock-based compensation expenses as of yet.
However, you need to put the numbers into context.
Imagine if Palantir’s top engineers served their notices to quit the company after they received job offers with better pay. What would happen to their plethora of contracts and stock price? For an analytics company, there is nothing worse than this. To avoid this scenario, it has to keep its objectives aligned with its talented employee base. The best way to do that is through stock options, a common strategy among major tech companies.
Financial Performance is Rock Solid
Although valuation is an issue, there is very little else Palantir will complain about. The company continues to grow revenue by leaps and bounds. Every month it is signing several lucrative contracts. It has a nice mix of revenues from both the commercial front and the government side.
During Q2, Palantir closed 62 deals worth $1 million or more, including 30 valued at $5 million and 21 with a value of $10 million and above. Growth in government revenue was 66% higher than last year’s numbers. Meanwhile, U.S. commercial revenue jumped 90% from the year-ago period, and commercial customer count rose 32% sequentially. (See Palantir stock charts on TipRanks)
Palantir also kickstarted a subscription-based platform of its analytics technology. Foundry for Builders is targeting start-ups. It is initially focusing on companies where former employees are working. In time, they will expand further. It is all part of the company’s strategy to diversify into other areas.
Losing Out on the ICE Relationship
Palantir’s controversial partnership relationship with ICE may be coming to an end. Since 2013, ICE has been using Palantir’s Falcon platform. However, the federal agency is looking to develop its own in-house system to replace Falcon.
Investors need to watch out for two things if ICE decides to pull the plug. Firstly, PLTR stock will face a momentary blip if this happens. That is a good thing. Shares are trading at very high price multiples. So, value investors looking for an opening will have their chance if and when the relationship ends. The other thing worth noting is more long-term in nature. Although the loss of revenue will hurt, Palantir’s reputation will benefit.
In addition, virtually not a day goes by when the company doesn’t ink a new contract. Palantir recently won a U.S army contract for $823 million and another four-year deal with Veteran Affairs of $90 million. Palantir wants to become the default operating system for the U.S. government. It is a lofty aim, but the company is progressing in the right direction.
Insider Selling Needs to Be Put into Perspective
Since PLTR went public, not a single insider has purchased stock on the open market. Meanwhile, insiders have sold more than $1 billion of stock since its debut in September. This is never good news. If a company is doing well, why wouldn’t insiders want to snap up more stock?
Insiders are likely selling aggressively because they want to make some cash after waiting patiently for nearly two decades. They want to make some money after being so patient, but even after those sales, insiders still hold significant stakes in the analytics company.
There is also criticism about the company’s investing in gold bars, SPACs, and paying off debt. Investors wonder, if shares are a good investment, why is management not buying back stock? However, there is a flip side to that argument. Bullish investors can make a case that by diversifying investments, management is improving the resiliency of the business. Palantir itself has said that the gold bars investment is protection against a ‘black swan event.’
Meanwhile, SPAC investments allow Palantir to form strategic alliances with successful tech start-ups and help them go public.
Wall Street’s Take
Wall Street is bearish on PLTR stock at the moment. It has a Moderate Sell consensus rating, based on a total of seven ratings.
Three analysts a Hold rating, and three have a Sell rating. One analyst has assigned the data analytics company a Buy rating.
The average Palantir price target is $24.33, implying a downside of 6.42%. Analyst price targets range from a high of $31 per share to a low of $18 per share.
Bottom Line
Palantir management deserves a pat on the back. Since debuting, the company has rarely put wrong foot forward. Its strong relationship with government agencies is something every defense contractor dreams about. It is investing heavily in technology, expanding its product suite, and gaining contracts left, right, and center.
The only valid argument against it is overvaluation. Yet if the company loses out on its ICE contract, or if it underperforms on November 9, when it will next report earnings, then you will have the ideal opportunity to snap up shares.
Disclosure: At the time of publication, Faizan Farooque did not have a position in any securities mentioned in this article.
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