Big Data Doesn’t Exempt Palantir Technologies From Big Problems

As you know, big data rules the world. And thanks to innovations in artificial intelligence and machine learning, technology firms are utilizing the vast amounts of digital footprints that we collectively emit into actionable advice for client corporations. Palantir Technologies (NYSE:PLTR), which specializes in harnessing the power of data analytics to facilitate confidence-inspiring decisions, is one such contender. However, PLTR stock stands out in this crowded field for being levered to diverse industries.

PLTR Stock: Headquarters
Source: Sundry Photography /

What caught my eye was that Palantir partnered with Ferrari (NYSE:RACE) to integrate and analyze performance data to assist its Formula 1 endeavors. Although not the most popular auto racing sport in the U.S., F1 has a huge following internationally. Personally, I believe that Palantir’s data analytics deal with Ferrari speaks to the versatility underlining PLTR stock.

Outside of baseball, I can think of very few sports that are dependent on data as Formula 1. In the modern era, every component of these specialized race cars is scrutinized. Teams spend millions every year on wind tunnel tests to ensure full aerodynamic efficiency, along with real-world practice sessions to ensure developmental progress before the first race of the season.

Beyond the preparatory work, there’s the race itself. Currently, the Mercedes-AMG Petronas Formula One Team dominates the grid. However, every now and again, smart pitstop strategies can lead to lesser teams stealing victory. And that’s because every race is different, featuring multiple variables that flash on the fly. Team managers must make stressful decisions when to bring in their drivers based on metrics such as on-track traffic and tire degradation.

Basically, it’s a chess match that occurs at over 200 miles per hour, and it can catch out even the best teams. However, with advanced data analytics like Palantir, Ferrari and other teams can strategize ahead of time various race day simulations, giving race managers a significant advantage.

Naturally, F1 is an excellent technical showpiece for PLTR stock, which has me excited about the underlying business. Still, there’s no test quite like the novel coronavirus.

The New Normal Could Push PLTR Stock to Its Limit … or Beyond It

Beyond the glitz and glamor of Formula 1, Palantir is involved in other businesses, mostly dealing with life-or-death matters. The brand is commonly associated with law enforcement, military/defense and other government services. Further, as the social and economic landscape changes due to Covid-19, PLTR stock could see its fundamental profile rise.

To understand this, we should consider the crux of Palantir’s business as it relates to governmental services, such as for a hypothetical example, the Internal Revenue Service. As you know, the IRS has to use algorithmic analyses to filter out which tax returns to analyze and which to skip over.

One of the ways that tax cheats get in trouble is when they deliberately underreport their income. The IRS isn’t stupid. Before you submit your taxes, the organization knows generally what taxable income a business of a particular size and industry will generate. Thus, if you fall outside that range, the IRS will start digging in a little deeper.

Hypothetical demo of data analytics
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Source: Chart by Josh Enomoto

If it later finds that you have a history of reporting anomalous income relative to industry norms, guess what? Probably, you’re looking at an audit.

Of course, doing this exercise by hand would be a gargantuan and likely impossible task at scale. Therefore, tax agencies like the IRS deploy data analytics software like Palantir.

On the surface, this seems a net positive for PLTR stock. However, my concern is the lingering impact of the novel coronavirus. As Bocconi University researchers demonstrated, the 1918 Spanish flu imposed long-term social and economic consequences. This could surprisingly impact Palantir’s business moving forward.

As a far-reaching example, the New York Times reported that many employees currently working from home don’t want to lose many of the benefits of remote operation. For some employers, that may be an unpalatable proposition. Therefore, it’s at least possible that we’ll see a surge in the so-called gig economy.

But how would the IRS determine what is anomalous tax return data for gig workers? Because this economy encompasses everything from dog walkers to medical illustrators to people on the YouTubes (as the kids like to say), it’s incredibly difficult to determine true data variance when the whole platform is variance personified.

Thus, it’s possible that the true practicalities of Palantir’s solutions could be stretched to their limits or beyond. And that risks volatility in PLTR stock as client companies seek more effective or less costly options in the new normal.

Business Risks Abound as Well

Now, if the above sounds like I’m stretching the case for caution too thin, don’t worry: the new normal offers much more credible headwinds to PLTR stock.

According to Palantir’s S-1 filing (page F-58 to be exact), sales from commercial businesses represented 53% of total revenue. For the six months ended June 30, 2020, the government segment represented 53% of top-line sales.

This makes sense, given that many businesses were heavily impacted by the coronavirus pandemic. On the flipside, government agencies suddenly had a need for data analytics, such as for contact tracing. During this time, machine learning specialists like IBM (NYSE:IBM) saw their profile move higher.

But for Palantir specifically, the new normal could present a precarious business landscape. Yes, government revenue channels will likely increase in value. But what about mainstay commercial industries like the airliners? PLTR stock is exposed to the sector, which will surely play into its overall valuation.

Therefore, in some ways, PLTR is like an exchange-traded fund. Some components of Palantir will surely rise. Others risk not only a decline but a cratering.

That’s not to say that PLTR stock is hopeless. As I stated near the top, I appreciate the underlying data science. But how relevant that data science will be holistically is the question. Conservative investors may just want to wait until well after the election before making their decision.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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