Big data analytics company Palantir Technologies (NYSE: PLTR) reported a 36% rise in revenue during its Q3 earnings call. But PLTR stock plummeted on the news. Are investors losing faith in Peter Thiel's secretive data haven?
Is Palantir stock a buy right now?
As Palantir has dropped close to 20% in the past couple of days, fans of the company are rightly asking is it time to buy the dip?
Buying the dip is a favorite way for investors to own a stake in a top-quality company at a knockdown price. However, it can be hard to know when the stock will stop dipping when the general market is looking bearish. If the stock keeps dropping, it can be akin to catching a falling knife.
Palantir has only been listed on the NYSE since October 2020. And since then, the PLTR share price has risen 144%. That's an impressive start and confirms shareholders have a lot of faith in the stock.
Palantir's COO, Shyam Sankar, highlighted the outstanding quarter in his opening remarks, saying, "It was a fantastic quarter across the board."
Along with a 36% jump in revenue, Q3 saw commercial revenue growth accelerate for the fourth quarter in a row. And US commercial revenue growth jumped 103% year-over-year.
It is seeing demand rising across three distinct areas; defense, mobility, and health care. These include L3Harris Technologies (NYSE: LHX), Huntington Ingalls Industries (NYSE: HII), The NHS, academic medical centers and much more.
Palantir netted 34 new customers in Q3, which is also an impressive feat. And comes close to doubling its commercial customer count since the turn of the year.
So, what scared investors away?
Its main issue seems to be its contract sizes are small for the market cap of the company. Big contracts are vital to ensure strength in revenues over the long term.
Prior to the Q3 earnings call, the company market cap was around $55 billion. After the recent drop, it's now worth around $44 billion.
In Q3, Palantir closed 18 deals worth $10 million or more, down from 21 deals worth $10 million or more in Q2.
It increased its deals worth $5m or more from 30 to 33 quarter-over-quarter. And it netted 54 deals worth $1 million or more, down from 62 in Q2.
So, it would seem some investors believe it's overvalued, and this drop may be a natural correction.
Indeed, the stock market, in general, appears to be on shaky ground, with lots of share prices consolidating.
Palantir is a favorite of fund manager ARK Invest, as is Tesla (NASDAQ: TSLA). Since Elon Musk asked if he should sell 10% of his Tesla shares via a Twitter poll, it's put pressure on ARK Invest' holdings.
Nevertheless, ARK Invest has a firm conviction in the company's future and bought another 905,352 Palantir shares in its ARKK ETF on November 11. Additionally, it added 121,510 PLTR shares to its ARKQ fund and 224,988 shares to its ARKW ETF the same day.
Therefore, some investors believe now is the time to buy the dip in Palantir stock.
What does Palantir Foundry do?
Palantir's Foundry platform simplifies the connection between back-end data management and front-end data analysis. Foundry allows Palantir's clients to source, connect, and transform data to meet their needs and use it to improve their processes and products.
Foundry connects a client's data analytics to its operational systems, and the value in utilizing this software is rapidly becoming apparent to more and more companies. By opting for Foundry's Infrastructure as a Service model, they can very quickly reduce their operational costs while improving data delivery speed.
Connected vehicle company Wejo is developing market-ready applications in as little as six weeks, thanks to Foundry. At the same time, Robotics tech company Sarcos (NASDAQ: STRC) is integrating 0.5 trillion data points per month to accelerate the design, maintenance and commercialization of their Iron Man suits. Furthermore, aerospace company Lilium (NASDAQ: LILM) is flying through ground and flight testing. Thanks to Foundry, it is handling the vast data generated by every sensor streaming from the aircraft.
Will Palantir stock climb again?
Bull case
Palantir still has a lot of mystery around it and two decades of stealthy connections with government agencies such as the CIA. This gives investors faith that it will be a defensive stock for the long term.
Since going public, the company is also looking to expand its reach beyond government agencies to scale into assisting mainstream businesses. So far, it appears to be making progress, and the bulls see its more minor contract wins as a promising sign it's winning the type of contracts that can quickly scale.
Furthermore, its Foundry platform is a structural piece of the puzzle that once customers build on, they're unlikely to change it out for an alternative. This reduces the likelihood of churn, giving it staying power.
Tackling climate change and cybersecurity
Palantir has recently brought two potential game-changing modular offerings to market. The first targets carbon emissions management and the second is anti-money laundering for crypto and fintech.
Both climate change and cybersecurity are hot themes in the headlines, as well as areas of investment for businesses everywhere. If Palantir can help companies get a handle on these areas, they stand to do very well indeed.
Foundry offers clients digital twin and supply chain capabilities to view revenue, margin, production and emissions in real-time. While also providing a way to manage their emissions targets and simulate emissions impacts.
As crypto has been criticized for its part in the emissions problem, this presents an addressable target audience for Palantir too.
Furthermore, the ability to help crypto companies tackle anti-money laundering is another potential game-changer.
Bear case
Palantir's connections with the CIA and government agencies may go against it in the eyes of foreign client targets. The company would like to expand its footprint outwith the United States, but this is proving harder than it initially thought.
Palantir's earnings from US companies have grown by 103% year-over-year, which is great for the bull case that it can scale non-government contracts. But it's bearish in that it's the US and not foreign markets.
Gross margin continues to grow, which is great, but operational expenditure outpaces revenues. It is, therefore, still a loss-making company, and this quarter showed a net loss of $102,137. Compared to a net loss of $138,580 in Q2.
The company also pays out a hefty sum to its senior management. In Q3, it spent $184.8 million on stock-based compensation, which seems to be on par with previous quarters.
Indeed, year-to-date, these stock-based compensation costs amount to over $611 million, on revenues of $1.1 billion. That's over 50% of its revenues gone in paying out shares to employees. This may be concerning shareholders, who would prefer to see the funds used to grow the business.
Finally, investors may be concerned that growth will stagnate if it can't continue to win big contracts at pace.
Generally, Palantir's Q3 earnings results were great. But investors should weigh up all these pros and cons before jumping into the stock.
