2020 was a great year for software stocks. Software stocks as a group outperformed the S&P 500 by 36 percentage points, the sector’s strongest performance in two decades — but there’s a downside to that.
Jefferies analyst Brent Thill points out that valuations in the sector now look “stretched” and there’s not a whole lot of potential left for “multiple expansion” among software stocks. While there’s still room for certain software names to rise, Thill believes that this will depend on improvement in “fundamentals.”
Luckily for Palantir (PLTR) investors, Palantir is one of the companies that Thill thinks have what it takes, and to help lead the sector even higher in 2021.
“We like the unique nature of Palantir’s offering for high-end data analytics use cases,” writes Thill, predicting that the company will enjoy 30% annual sales growth rates for at least “the next couple of years,” and post improved profits on those revenues to boot.
The 5-star analyst calls the company’s products “best-of-breed,” and cites interviews with Palantir clients who say that the company’s products are very usable and also very “sticky” — indicative of high switching costs that should depress customer churn and deliver pricing power.
Positing a $30 price target (up from $18 previously) and a Buy rating, Thill argues that Palantir stock deserves a premium valuation even relative to other high-growth peer stocks. (To watch Thill’s track record, click here)
What does a $30 price target imply for Palantir? Thill says he’s assuming Palantir can extract 81% to 82% gross profit margins from sales of $1.4 billion in 2021 and $1.8 billion in 2022. On the bottom line, this should work out to “non-GAAP” (i.e. pro forma) profits of $0.17 per share this year (nearly twice what the company probably earned in 2020) and $0.23 per share next year.
It’s important to emphasize, however, that these are not profits as calculated according to generally accepted accounting principles. In fact, most analysts who follow Palantir stock don’t expect GAAP profitability to emerge before 2024 at the earliest. As such, Thill isn’t able to attach a “P/E” multiple to a stock that has no GAAP “E”. Instead, the analyst values the stock on its revenues.
As the analyst admits, his $30 price target assumes investors will be willing to pay a staggering 50 times fiscal 2021 revenues to own Palantir stock, and 39 times fiscal 2022 revenues. This is despite Thill’s admitting that he has only “limited revenue visibility” into Palantir’s future, and that the company’s revenue streams are subject to “lumpiness in quarterly bookings,” and at risk of “US government budgetary changes.” And again, Thill admits that these valuations represent a “premium” to what even other high-growth software names are fetching.
Thill is the only bull in the picture right now- with the stock displaying a Hold analyst consensus. The 12-month average price target stands at $16.50, marking a 36.5% downside from current levels. (See PLTR stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.