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Palantir Stock: Lofty Price Despite Robust Growth
Stock Analysis & Ideas

Palantir Stock: Lofty Price Despite Robust Growth

Palantir Technologies (PLTR) is a software company that specializes in big data analytics, serving public institutions, private enterprises, and the non-profit sector.

Despite a strong Q3 2021 earnings report, Palantir has not created momentum for its shares, having losses of about 8.4% in 2021 and 12.4% for the past month. I am bearish on PLTR stock. Its robust revenue growth is a strong reason to like the stock, but many other key reasons make it risky now. (See Analysts’ Top Stocks on TipRanks)

Q3 2021 Highlights

Palantir reported a strong third-quarter 2021 earnings report, beating on revenue ($392 million versus $385 million expected). EPS came in exactly at expectations, $0.04 adjusted. On the positive side, Palantir’s revenue grew 36% year-over-year. The bad news is that this growth shows a slowdown compared to the two consecutive quarters of 49% year-over-year growth.

Revenue growth for Palantir is among the most positive factors about its fundamental analysis, along with its belief of expected annual revenue growth of 30% or higher through the year 2025.

Palantir’s optimistic Q4 revenue expectation of $418 million, higher than the current Refinitiv estimates of $402 million, could have generated a stock price rally. Still, these numbers failed to impress investors. There seem to be at least four important reasons why this happened.

Government Revenue Growth Missed Expectations

The majority of Palantir’s revenue is government-based rather than commercial-based. For the nine months ended September 30, 2021, Palantir reported total revenue of $1.1 billion. Government revenue was $658 million and commercial revenue was $450.6 million.

RBC Capital analyst Rishi Jaluria after the Q3 2021 report downgraded Palantir stock to underperform.

“Government, to us, is the strongest part of Palantir’s business and while we expected a deceleration, the growth rate was nearly cut in half from Q2 to Q3,” Jaluria said.

Net Loss Remains a Concern

Palantir is an unprofitable technological company with widening losses over the past three fiscal years.

For 2018, 2019, and 2020 the net losses reported were $580.03 million, $588.13 million, and $1.17 billion, respectively. For Q3 2021 the net loss was $364 million compared to a net loss of $1 billion for Q3 2020.

Stock Dilution

Palantir has chosen to fund its growth after its 2020 direct listing with a history of stock dilution. Data from MarketWatch shows that in 2018, 2019, and 2020 financing activities from the sale of common and preferred stock resulted in $109.15 million, $124.4 million, and $1.24 billion, respectively. This trend has continued in 2021 with $376.69 million proceeds from the sale of stock for the first six months.

The key problem for Palantir is that despite its robust revenue growth, it cannot be profitable. This stock dilution trend emphasizes the problem to the investors, as it weighs negatively on its intrinsic stock valuation.

Valuation

Data from Simply Wall Street shows that PLTR stock is relatively overvalued based on its PB Ratio (19.2x) compared to the U.S. Software industry average (7.1x).

Data from CSIMarket shows that the price-to-sales (Q3 TTM) ratio for Palantir is 51.53 compared to price-to-sales (Q3 TTM) ratios of 8.81, 6.05, and 2.06 for the Software & Programming Industry, Technology Sector, and S&P 500 respectively.

Wall Street’s Take

Turning to Wall Street, Palantir has a Moderate Sell rating, based on one Buy, three Holds, and four Sell ratings. The average Palantir price target of $23.14 represents 8.1% upside potential.

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

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