Palantir Technologies (NYSE: PLTR) stock has endured a tough year, with its share price down over 62%. The company launched via direct listing in October 2020 at less than $10 a share. Palantir's share price then hit an all-time high of $45 at the end of January 2021. This was at the height of the meme-fuelled GameStop trading craze, and PLTR was swept up in the frenzy. Its share price has since lost 70% of its value, and investors wonder if investing in Palantir is now a lucrative idea.
What is Palantir?
Palantir Technologies is a data collection company with close ties to government agencies both in the US and abroad. The firm develops data integration and software solutions using advanced tech. Its Commercial segment offers services to clients in the private sector. And its Government segment provides solutions to the US federal government and non-US governments.
Palantir offers automotive, financial compliance, legal intelligence, and M&A solutions. Its products include Palantir Gotham and Palantir Foundry.
The company was founded by Stephen Cohen, Nathan Gettings, Joseph Lonsdale, Alex Karp, and Peter Thiel in 2003.
Peter Thiel is a German-American billionaire entrepreneur and venture capitalist. A co-founder of PayPal (NASDAQ: PYPL) and Founders Fund and the first outside investor in Facebook (NASDAQ: FB). His association with Palantir has elevated its importance in the eyes of investors.
Alex Karp is also a familiar face in Silicon Valley. He, too, is a billionaire and calls himself a political progressive.
How does Palantir make money?
Palantir makes money selling its data collection and software building expertise to private companies and federal agencies.
The company demonstrates strong cash generation and continues to win contracts. In Q3, 2021, it closed 54 deals of $1m or more in total contract value, including 33 deals of $5m or more and 18 deals of $10m or more.
In 2018, Palantir's average revenue per customer was $5.2m. This grew to $5.6m in 2019. The average revenue per customer in Q3 2021 was $7m.
Palantir Foundry is helping streamline production processes, making them faster and cheaper. For instance, in producing Airbus' A320 airliners, Ram pickup trucks, auto parts, PPE and tractors. Likewise, it is streamlining the production of fighter jets, naval ships, and land vehicles in defense. Palantir's defense clients include L3Harris and Huntington Ingalls.
Foundry is helping to manage over 300 million patient lives via Palantir's healthcare contracts, including the NHS and the NIH.
Other clients include British connected vehicle data start-up Wejo, Sarcos Robotics, Merck, Hyundai Heavy Industries, Dewpoint Therapeutics and Rio Tinto.
Financials and Metrics:
Palantir enjoyed a record-breaking Q3 as customer account growth and strong free cash flow exploded. It generated revenue growth of 36% in the quarter, bringing year-to-date revenue to more than $1.1bn, up 44% year-over-year.
The company is currently sitting on $2.5bn in cash and ended Q3 with no debt.
Palantir has a $29bn market cap. It has a forward price-to-earnings ratio (P/E) of 64. Its price-to-book value (P/BV) is 12, and its price-to-sales ratio (P/S) is 18.6. These metrics remain high but far below recent valuations.
Nevertheless, it's projected 2021 ROE is 12%. Palantir's Q4 revenue guidance projects revenue of $418m and an adjusted operating margin of 22%. This implies full-year 2021 revenue of $1.5bn, representing another year of revenue growth of 40% or higher.
It also raised its FY21 annual adjusted free cash flow guidance above $400m, up $100m on its previous guidance.
Is Palantir a good investment?
Palantir has many fans that believe in its growth potential. It also has its critics. Being a favorite of ARK invest has been a double-edged sword. The scrutiny has brought it considerable hype and recognition, cultivating a strong fanbase but also raising expectations potentially beyond fair value.
Nevertheless, Palantir does have an entrenched business solving real-world problems. It's cash-rich, debt-free and enjoying notable growth. It also has a powerful Board.
In a JV with Merck, the companies plan to deliver a secure data analytics platform for the semiconductor industry, accelerating the use of AI and Big Data to solve semiconductor challenges.
Some camps believe semiconductor performance will rapidly improve in the coming years. This contributes to Palantir's potential as a successful growth story.
Palantir's core focus is on growth with high-quality revenue. Its business model is to make the West, including America, the strongest it's ever been to ensure global peace and prosperity. This leads it to take strong but controversial positions in its contracts.
An example is a rumor it took over Project Maven from Google in 2019. This highly controversial military AI program was deemed too unethical for Google to manage. It's a Pentagon-sponsored program to build an AI-powered surveillance platform for autonomous drones.
With such a firm grip on data and covert intelligence (going back 15+ years) and close ties to the US intelligence community, Palantir doesn't really have any valid competitors. A few comparable firms include Dassault Systemes (French), Intellect Design Arena (Indian), Cellebrite (Israeli), Telos (American) and Cognyte Software (Israeli).
However, in its Q3 earnings call, Palantir said its real competition is its customers themselves. If they create their own solutions in-house, they don't need to pay Palantir. But it's been finding that companies try and fail to produce their own in-house solution, spending a fortune and wasting considerable time. They are then delighted to discover Palantir can provide a solution that works within days at scale and are more than happy to pay for it.
The combination of these factors has many Palantir fans willing to buy the dip.
What are the risks of investing in Palantir?
Palantir has been heavily criticized for its excessive issuance of stock-based compensation or restricted stock units (RSU). This has led to more and more shares being issued, diluting the value of shareholders' current holdings.
The company is investing in sales teams and channel partners to accelerate rapid expansion in its customer base. In Q3 its marketing expenses rose 144% quarter-over-quarter. This is something it will want to keep under control.
Will Palantir initiate a stock buyback?
A stock buyback would increase shareholder value. But it seems unlikely that the company would opt to buy back shares so early into its public life. Particularly as so much of its capital is invested in RSUs, and it potentially wants to keep cash free for M&A.
In earlier years, Palantir made six acquisitions and, in 2021, made over 20 investments in SPAC deals, including Babylon Health, Sarcos, Roivant Sciences and Celularity. Many of these target companies have also become Palantir clients.
A recent Fortune report stated some Palantir analysts are concerned about this practice. That's because it gives the impression of solid sales growth, but this may be less sustainable than perceived.
Why is PLTR such a heavily shorted stock?
With the broader macro environment looking shaky for tech and growth stocks, Palantir has become a short-seller target.
As of January 2022, the S&P reported 102 million shares of Palantir were sold short. That's triple its average daily volume.
But considering the stock has decent financials, and Palantir continues to win contracts, retail investors remain committed and anticipate a short squeeze.
Is Palantir stock a buy?
At under $14 a share, PLTR stock fans are screaming 'buy the dip,' but it may still be considered overvalued on closer inspection. This uncertainty means the share price may well fall further as volatility and doomsday headlines proliferate. But the jury is out.
Like him or loath him, Peter Thiel is an incredibly well-connected individual throughout governments and Big Tech, therefore betting against him seems futile.
Palantir is at the cutting edge of futuristic product design with its Navy, Airforce, and Space Force contracts. Meanwhile, many macro factors are helping create new opportunities for Palantir to grow. It sees The Chinese Communist Party's threat to Western democracy a tailwind to assisting clients in securing their assets.
It's also benefiting from the climate change narrative by servicing the need for carbon emissions management and EV charging infrastructure. It also claims to be uniquely positioned at the beginning of big secular trends to provide cutting-edge products.
Deutsche Bank recently lowered its PLTR share price target to $18, while RBC Capital Markets lowered its share price target to $15.