SHOULD YOU BUY PALANTIR?



As somebody who invests in companies for the future, I only consider stocks at the heart of ๐—Ÿ๐—ข๐—ก๐—š ๐—ง๐—˜๐—ฅ๐—  ๐—š๐—ฅ๐—ข๐—ช๐—ง๐—› ๐—ง๐—ฅ๐—˜๐—ก๐——๐—ฆ. 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 ๐—œ๐—ฃ๐—ข ๐—™๐—ฅ๐—˜๐—ก๐—ญ๐—ฌ - The stock has shot higherโ€ฆ and higherโ€ฆ and higher!


So has the ๐—•๐—ข๐—”๐—ง ๐—ฆ๐—”๐—œ๐—Ÿ๐—˜๐—— 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 โ€œselectiveโ€ in who they wish to work with. This has helped them win the trust of the ๐—จ.๐—ฆ ๐—š๐—ข๐—ฉ๐—˜๐—ฅ๐—ก๐— ๐—˜๐—ก๐—ง. 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 Palantirโ€™s ๐—ง๐—ข๐—ง๐—”๐—Ÿ ๐—”๐——๐——๐—ฅ๐—˜๐—ฆ๐—ฆ๐—”๐—•๐—Ÿ๐—˜ ๐— ๐—”๐—ฅ๐—ž๐—˜๐—ง in the long term, the companyโ€™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 ๐—ฃ๐—ฅ๐—ข๐—™๐—œ๐—ง๐—”๐—•๐—Ÿ๐—˜ in 2021 with a price-to-earnings ratio of 239. Itโ€™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 ๐—ฅ๐—ข๐—–๐—ž ๐—ฆ๐—ข๐—Ÿ๐—œ๐—— ๐—ง๐—˜๐—–๐—›๐—ก๐—œ๐—–๐—”๐—Ÿ๐—ฆ that has been perfect for short term traders.!


NOW THE BAD:


โšก ๐—ฃ๐—ข๐—ฆ๐—ฆ๐—œ๐—•๐—Ÿ๐—˜ ๐—–๐—ข๐—ฅ๐—ฅ๐—˜๐—–๐—ง๐—œ๐—ข๐—ก


The stock price has already ๐—ง๐—ฅ๐—œ๐—ฃ๐—Ÿ๐—˜๐—— 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 IPOโ€™s and is often followed by a large correction as high as 30-40%!


โšก ๐—”๐—ก๐—”๐—Ÿ๐—ฌ๐—ฆ๐—ง ๐——๐—ข๐—ช๐—ก๐—š๐—ฅ๐—”๐——๐—˜๐—ฆ


This month, ๐Ÿฑ* ๐—”๐—ก๐—”๐—Ÿ๐—ฌ๐—ฆ๐—ง๐—ฆ 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.


โšก ๐—˜๐—ซ๐—ฃ๐—˜๐—ก๐—ฆ๐—œ๐—ฉ๐—˜ ๐—ข๐—ก ๐—ฃ๐—ฅ๐—œ๐—–๐—˜ ๐—ง๐—ข ๐—ฆ๐—”๐—Ÿ๐—˜๐—ฆ


Palantirโ€™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 ๐—–๐—›๐—˜๐—”๐—ฃ๐—˜๐—ฅ 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).



โšก ๐—Ÿ๐—”๐—–๐—ž๐—ฆ ๐——๐—œ๐—ฉ๐—˜๐—ฅ๐—ฆ๐—œ๐—ง๐—ฌ


Palantir is becoming increasingly reliant on government contracts to fuel growth. The company only has ๐Ÿญ๐Ÿฎ๐Ÿฑ ๐—–๐—จ๐—ฆ๐—ง๐—ข๐— ๐—˜๐—ฅ๐—ฆ and relies on less than 20 customers for 60% of itโ€™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.


โšก ๐—จ๐—ฃ๐—–๐—ข๐— ๐—œ๐—ก๐—š ๐—Ÿ๐—ข๐—–๐—ž ๐—จ๐—ฃ ๐—˜๐—ซ๐—ฃ๐—œ๐—ฅ๐—”๐—ฅ๐—ฌ ๐——๐—”๐—ง๐—˜


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 ๐—ฆ๐—˜๐—Ÿ๐—Ÿ-๐—ข๐—™๐—™ in the share price.


โšก ๐—Ÿ๐—œ๐— ๐—œ๐—ง๐—˜๐—— ๐—ง๐—ข๐—ง๐—”๐—Ÿ ๐—”๐——๐——๐—ฅ๐—˜๐—ฆ๐—ฆ๐—”๐—•๐—Ÿ๐—˜ ๐— ๐—”๐—ฅ๐—ž๐—˜๐—ง (๐—ง๐—”๐— )


In itโ€™s S-1, Palantir claimed that itโ€™s total addressable market is around $119bn. With the stock valued at $49bn, investors are willing to pay 41% of itโ€™s ๐—ง๐—”๐—  for the sharesโ€ฆ Thatโ€™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 ๐—ข๐—ฉ๐—˜๐—ฅ๐—•๐—ข๐—จ๐—š๐—›๐—ง and it's $50bn valuation represents where Palantir should be trading in a few years... Not today!




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Disclaimer: All trading involves risk. Only invest money that you can afford to lose and remember that past performance doesnโ€™t necessarily guarantee future results. Everything posted by me is for educational purposes only. I am not a financial advisor and no information on this website or any accounts linked with myself should be considered as financial advice. Remember, all trades are at your own risk. 

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