Palantir Stock: Worth Considering Despite Valuation and Dilution

Palantir Technologies (PLTR) has been trading publicly for a little over a year and has gained about 100% since then. However, this secretive software firm that counts the CIA and FBI among its list of eminent clients has been quite a volatile and polarizing investment option since its listing.

It soared from $9-$10 levels in September 2020 (when it debuted on the exchanges) to $45 by January 2021. Since then, it has fallen to trade at $18-$19 levels. Does it make it a bad investment? Not really.

I am bullish on PLTR stock. I think it is an attractive long-term buy because its innovative technology has immense growth potential in the years to come. (See Analysts’ Top Stocks on TipRanks)

Palantir specializes in big data analytics. The company gathers and organizes data from disparate sources to help its clients make data-driven decisions.

The company works closely with the U.S. Army and the Department of Defense (DoD). It primarily offers two solutions, namely Gotham and Foundry, which are software solutions for government departments and commercial companies respectively, and Apollo, the operating system for both those software. 

Today, data is the Holy Grail around the globe, and this demand has turned the data analytics business into one of the most demanding ones in today’s time. Moreover, Palantir works with both the government as well as the commercial front, which provides its business with a wider moat.

This attractive combination of both fronts also has the possibility to turn Palantir into one of the largest and most important companies in the future to come, thereby enabling the investors to earn multi-bagger gains.  

Building a Sustainable Business

Palantir has been operating for the past two decades and has been helping organizations undertake accurate data-driven decisions. The company is one of the most trusted analytics platforms for the U.S. government and its allies.

It is said that back in 2011, the U.S. Army had reportedly used Gotham to track down Osama Bin Laden. The U.S. Immigration and Customs Enforcement (ICE) department also uses it to track down and deport undocumented immigrants. 

Palantir worked exclusively for the U.S. Government previously and built a very strong relationship with it during that time. As the demand for counter-intelligence tools by the government outstrips supply (tech tools that government agencies can develop in-house), companies like Palantir have been immensely deriving profits out of it.

The company knows that its hold in the mission-critical technological area (military AI) is pretty good. Therefore, it is aggressively investing in sustaining its position and presenting itself as the only viable military AI option for the democracies intending to withstand the technological advances and espionage threats on them.

Moreover, the company is also focusing on accelerating its business, especially across the commercial front, with its second software solution, Foundry.

Foundry has seen an incredible increase in commercial adoption this year, with the number of private sector customers rising by about 135% as of September 30. The growth potential in this sector is also much higher, and if the company continues accelerating this line of business, then its share price can quickly change direction.  

Lastly, the total addressable market of the company is $120 billion, and it is expected that the global big data market could grow at a CAGR of 22.4% through 2030. Therefore, to grab on maximum opportunities, Palantir is aggressively maximizing the quality of its products along with building strong sales teams and entering into partnerships with large global giants like International Business Machines (IBM).  

Improved Financials

Palantir has never been a profitable company since its inception. Back in 2020, it had generated a revenue of $1.09 billion along with a net loss of $1.17 billion.

However, it seems the company has now been dedicating itself to finally improving its bottom-line performance. Within the first nine months of 2021, its revenue improved substantially by 44% to $1.11 billion and the net loss also narrowed down to $364 million from $1.02 billion.

Wall Street’s Take

Turning to Wall Street, PLTR stock has a Moderate Sell consensus rating. One out of eight analysts have given Palantir a Buy rating, three have Hold ratings, and the remaining four have suggested a Sell. The average Palantir Technologies price target of $23.14 implies 25.4% upside potential.

Stock Dilution and High Valuation

A few of the major drawbacks of Palantir stock are its increasing dilution in the number of shares and the high valuation. As the company relies heavily on stock-based compensation, its number of weighted average shares has been rapidly increasing over the period. Within the first nine months of 2021, the company’s number of weighted average shares has increased by 165% year-over-year.

Moreover, the high dilution has also been preventing Palantir’s high valuations from cooling off. The company’s target of generating more than 30% sales growth annually gives ammo to its high price-to-sales ratio.

Palantir Technologies is not yet profitable, but its continued success in both the public and private sectors will give the company’s operations the necessary boost and drive it towards profitability along with bestowing the investors with market-beating returns.

Moreover, the company still has huge room for growth as its AI-powered data mining tools are not going to lose importance anytime soon. Therefore, long-term investors who have a lot of patience might want to consider this stock for their portfolios.

Disclosure: At the time of publication, Hashtag Investing did not have a position in any of the securities mentioned in this article.