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SHOULD YOU BUY PALANTIR?
As somebody who invests in companies for the future, I only consider stocks at the heart of ๐๐ข๐ก๐ ๐ง๐๐ฅ๐ ๐๐ฅ๐ข๐ช๐ง๐ ๐ง๐ฅ๐๐ก๐๐ฆ. Any investor with this strategy has surely heard of the data analytics provider Palantir - and I must say well done to those who dove in at the IPO price!
The company is having enormous success at wining contracts within the US government sector having won some recent work with the army, FDA, Pentagon and Institute of Health! Thanks to this hot streak combined with an ๐๐ฃ๐ข ๐๐ฅ๐๐ก๐ญ๐ฌ - The stock has shot higherโฆ and higherโฆ and higher!
So has the ๐๐ข๐๐ง ๐ฆ๐๐๐๐๐ or is this stock still worthy of a place in your portfolio?
LET'S START WITH THE GOOD:
Palantir is a unique data analytics platform in that they claim to be โselectiveโ in who they wish to work with. This has helped them win the trust of the ๐จ.๐ฆ ๐๐ข๐ฉ๐๐ฅ๐ก๐ ๐๐ก๐ง. The company also works with non-government organisations - however their clear allegiance to big brother will limit their success in the private sector!
Although this could limit Palantirโs ๐ง๐ข๐ง๐๐ ๐๐๐๐ฅ๐๐ฆ๐ฆ๐๐๐๐ ๐ ๐๐ฅ๐๐๐ง in the long term, the companyโs choice to specialise in providing solutions to governments is providing them with a lot of near term success. Also, their recent negotiations with the UK government over some huge contracts is a sign that Palantir is not limited to the US government and may not even need the private sector!
Analysts are expecting the business to post annual earnings growth of 40% and become ๐ฃ๐ฅ๐ข๐๐๐ง๐๐๐๐ in 2021 with a price-to-earnings ratio of 239. Itโs refreshing to see a growth company that actually makes money, however I do believe that a forward PE of 239 is high for a company posting 40% growth.
The stock therefore seems to have got a bit ahead of itself with investors likely hoping for better than expected earnings. Palantir has done well so far in delivering a steady stream of good news which has kept the stock in an upwards trend with ๐ฅ๐ข๐๐ ๐ฆ๐ข๐๐๐ ๐ง๐๐๐๐ก๐๐๐๐๐ฆ that has been perfect for short term traders.!
NOW THE BAD:
โก ๐ฃ๐ข๐ฆ๐ฆ๐๐๐๐ ๐๐ข๐ฅ๐ฅ๐๐๐ง๐๐ข๐ก
The stock price has already ๐ง๐ฅ๐๐ฃ๐๐๐ in the first 3 months of trading. Investors eager to grab a piece of this exciting new growth stock have been prepared to pay any price and this rush has created a pop in the stock price. This is common for IPOโs and is often followed by a large correction as high as 30-40%!
โก ๐๐ก๐๐๐ฌ๐ฆ๐ง ๐๐ข๐ช๐ก๐๐ฅ๐๐๐๐ฆ
This month, ๐ฑ* ๐๐ก๐๐๐ฌ๐ฆ๐ง๐ฆ at Credit Suisse & Morgan Stanley have downgraded Palantir. They have both set price targets of $17 on the stock which despite representing a 70% increase from the IPO price, suggests a 40% pullback.
โก ๐๐ซ๐ฃ๐๐ก๐ฆ๐๐ฉ๐ ๐ข๐ก ๐ฃ๐ฅ๐๐๐ ๐ง๐ข ๐ฆ๐๐๐๐ฆ
Palantirโs revenue growth of 40% is not enough to justify a price to sales ratio of 37. For example, other similar growth stocks expecting to become profitable next year including Jfrog, Beyond Meat & Mercado Libre are all ๐๐๐๐๐ฃ๐๐ฅ on a price-to-sales ratio yet growing a lot faster! (check out a table below for more information on the fundamentals of some top growth stocks).
โก ๐๐๐๐๐ฆ ๐๐๐ฉ๐๐ฅ๐ฆ๐๐ง๐ฌ
Palantir is becoming increasingly reliant on government contracts to fuel growth. The company only has ๐ญ๐ฎ๐ฑ ๐๐จ๐ฆ๐ง๐ข๐ ๐๐ฅ๐ฆ and relies on less than 20 customers for 60% of itโs revenue! Compare this with other fast growing software or cloud companies like Snowflake, Fastly & Splunk which each have over 3000, 400 & 500 customers respectively! Having worked for a consultancy that relied on Santander & Barclays for 30% of our revenues, I have first-hand experience of how quickly a company can tank when they rely on a handful of clients.
โก ๐จ๐ฃ๐๐ข๐ ๐๐ก๐ ๐๐ข๐๐ ๐จ๐ฃ ๐๐ซ๐ฃ๐๐ฅ๐๐ฅ๐ฌ ๐๐๐ง๐
Insiders will be allowed to sell their shares in the company when February rolls around! Insiders own 80% of the total outstanding shares and if management are to cash out then this could spark a large ๐ฆ๐๐๐-๐ข๐๐ in the share price.
โก ๐๐๐ ๐๐ง๐๐ ๐ง๐ข๐ง๐๐ ๐๐๐๐ฅ๐๐ฆ๐ฆ๐๐๐๐ ๐ ๐๐ฅ๐๐๐ง (๐ง๐๐ )
In itโs S-1, Palantir claimed that itโs total addressable market is around $119bn. With the stock valued at $49bn, investors are willing to pay 41% of itโs ๐ง๐๐ for the sharesโฆ Thatโs high!
Palantir is an exciting company that has carved out a niche for itself in a fast growing industry. The company has delivered lot's of good news this year and that has whipped up a buying frenzy amongst growth investors. Right now I believe that the company is ๐ข๐ฉ๐๐ฅ๐๐ข๐จ๐๐๐ง and it's $50bn valuation represents where Palantir should be trading in a few years... Not today!
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