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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 𝗟𝗢𝗡𝗚 𝗧𝗘𝗥𝗠 𝗚𝗥𝗢𝗪𝗧𝗛 𝗧𝗥𝗘𝗡𝗗𝗦. 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 𝗜𝗣𝗢 𝗙𝗥𝗘𝗡𝗭𝗬 - The stock has shot higher… and higher… and higher!
So has the 𝗕𝗢𝗔𝗧 𝗦𝗔𝗜𝗟𝗘𝗗 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 “selective” in who they wish to work with. This has helped them win the trust of the 𝗨.𝗦 𝗚𝗢𝗩𝗘𝗥𝗡𝗠𝗘𝗡𝗧. 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 Palantir’s 𝗧𝗢𝗧𝗔𝗟 𝗔𝗗𝗗𝗥𝗘𝗦𝗦𝗔𝗕𝗟𝗘 𝗠𝗔𝗥𝗞𝗘𝗧 in the long term, the company’s 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 𝗣𝗥𝗢𝗙𝗜𝗧𝗔𝗕𝗟𝗘 in 2021 with a price-to-earnings ratio of 239. It’s 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 𝗥𝗢𝗖𝗞 𝗦𝗢𝗟𝗜𝗗 𝗧𝗘𝗖𝗛𝗡𝗜𝗖𝗔𝗟𝗦 that has been perfect for short term traders.!
NOW THE BAD:
⚡ 𝗣𝗢𝗦𝗦𝗜𝗕𝗟𝗘 𝗖𝗢𝗥𝗥𝗘𝗖𝗧𝗜𝗢𝗡
The stock price has already 𝗧𝗥𝗜𝗣𝗟𝗘𝗗 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 IPO’s and is often followed by a large correction as high as 30-40%!
⚡ 𝗔𝗡𝗔𝗟𝗬𝗦𝗧 𝗗𝗢𝗪𝗡𝗚𝗥𝗔𝗗𝗘𝗦
This month, 𝟱* 𝗔𝗡𝗔𝗟𝗬𝗦𝗧𝗦 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.
⚡ 𝗘𝗫𝗣𝗘𝗡𝗦𝗜𝗩𝗘 𝗢𝗡 𝗣𝗥𝗜𝗖𝗘 𝗧𝗢 𝗦𝗔𝗟𝗘𝗦
Palantir’s 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 𝗖𝗛𝗘𝗔𝗣𝗘𝗥 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).
⚡ 𝗟𝗔𝗖𝗞𝗦 𝗗𝗜𝗩𝗘𝗥𝗦𝗜𝗧𝗬
Palantir is becoming increasingly reliant on government contracts to fuel growth. The company only has 𝟭𝟮𝟱 𝗖𝗨𝗦𝗧𝗢𝗠𝗘𝗥𝗦 and relies on less than 20 customers for 60% of it’s 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.
⚡ 𝗨𝗣𝗖𝗢𝗠𝗜𝗡𝗚 𝗟𝗢𝗖𝗞 𝗨𝗣 𝗘𝗫𝗣𝗜𝗥𝗔𝗥𝗬 𝗗𝗔𝗧𝗘
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 𝗦𝗘𝗟𝗟-𝗢𝗙𝗙 in the share price.
⚡ 𝗟𝗜𝗠𝗜𝗧𝗘𝗗 𝗧𝗢𝗧𝗔𝗟 𝗔𝗗𝗗𝗥𝗘𝗦𝗦𝗔𝗕𝗟𝗘 𝗠𝗔𝗥𝗞𝗘𝗧 (𝗧𝗔𝗠)
In it’s S-1, Palantir claimed that it’s total addressable market is around $119bn. With the stock valued at $49bn, investors are willing to pay 41% of it’s 𝗧𝗔𝗠 for the shares… That’s 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 𝗢𝗩𝗘𝗥𝗕𝗢𝗨𝗚𝗛𝗧 and it's $50bn valuation represents where Palantir should be trading in a few years... Not today!
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