Nothing will quite top the excitement around Snowflake (NYSE:SNOW) for 2020’s top initial public offering (IPO). However, after Snowflake, arguably the next hottest new thing to hit the market this year was Palantir (NYSE:PLTR) stock.
Palantir has several things going for it. It already has a substantial revenue base closing in on a billion dollars a year. It has high-profile customers, including various departments of the U.S. government. Its service is viewed as mysterious and technologically-sophisticated. And Palantir has high-profile backers including Peter Thiel.
With all that going for it, what could go wrong? Quite a bit, in fact. Palantir has been running gargantuan losses, its business model isn’t proven, and insiders had been selling stock prior to the recent public stock offering. In fact, for all the hype, PLTR stock is actually a highly-risky investment.
The Recent Direct Listing
There are several things a prospective Palantir investor should know. For one thing, the current $10 stock price and generally flat trading since the direct listing launched makes Palantir seem like a potential bargain. Not many hot tech stocks sell for around $10/share after all. However, that’s misleading for two reasons. One, there is a stunning 2.3 billion shares of stock outstanding already, putting the market cap at more than $20 billion.
Two, there was a private market trading of Palantir stock prior to the IPO. Fortunately, this data was collected and put into the prospectus (pages 236 and 237).
As a table there shows, insiders were consistently trading Palantir stock for around $5 to $6 per share for the past two years. Interestingly, shares had hit new lifetime lows in August 2020. In fact, on its private listing, PLTR stock slumped to $4.17 per share in August just prior to when the company announced its plans to go public.
Business Is Booming?
Ahead of the stock offering, Palantir presented an image of a company that was on the mend. After more than a decade of deeply unprofitable operations, Palantir suggested that it has pivoted to a more services-oriented business model that will generate much higher profit margins. And indeed, to that effect, Palantir has announced significantly stronger results in 2020 year-to-date.
The insider stock trading record discussed above tells a different tale, though. The people closest to the company thought Palantir’s value was at best flat and possibly actually declining throughout 2020. PLTR stock was sliding on the private market, even as tech stocks in general were soaring.
Since the direct listing announcement in August, shares quickly shot up from the $4s to their current level around $10. Thus, while you may not have seen the traditional IPO pop that you’d get from a new company, make no mistake, the general public is paying twice as much for Palantir shares as insiders thought it was worth just this summer.
Beware the Fleeting IPO Pop
The classic move for a mediocre business about to go public is to call in favors, book revenue aggressively, and defer short-term expenses so a company looks good when it rings the opening bell. A few quarters after the IPO, once lock-ups expire and insiders can offload stock, the company will start reporting results more in line with its typical performance. That’s a common pattern, and something to watch out for at Palantir.
Think about it another way. Why might insiders have been so down on PLTR stock prior to the IPO? For one, Palantir loses loads of money and it was growing rather slowly, at least until this year. From 2018 to 2019, revenue grew just 25% and operating profit grew even less than revenue, as the company had negative operating scale (i.e. costs went up faster than sales). Incredibly, Palantir lost $580 million for full-year 2019 while bringing in only $743 million of total revenue.
That’s a fiasco. There’s no other way to put it. This would be close to disastrous even at a fast-growing company. And at 25% revenue growth, you’re never going to grow your way out of losses.
Does Palantir Have a Unique Edge?
In my reading of the company’s prospectus, it was hard to identify what exactly Palantir does that makes it stand out from rivals. There’s a lot of talk about data and helping companies make decisions, but that doesn’t actually provide me with much actionable data. It’s unclear how to evaluate this business’ prospects.
The bearish arguments around the company largely focus on its unsavory customers. Palantir works with Immigration and Customs Enforcement (ICE), spy agencies, and more. This has prominent politicians such as Alexandria Ocasio-Cortez attacking the company.
If you’re seriously considering investing in this company, this could be a problem. In a way, Palantir is like investing in private prisons, except without any of the profits or dividends. The bull argument is that this reputational risk is worth it because Palantir’s special software has a large total addressable market. But until they can demonstrate that the software can produce meaningful profits, it’s hard to get excited.
PLTR Stock Verdict
Aside from the glamour of contracting for secretive government agencies, there’s very little appealing here. In fact, the financial results are downright horrid. 2019’s results in particular were jaw-dropping. Rarely can a company this big run such a huge loss. Palantir was founded in 2003 and it’s still losing more than half a billion dollars a year. At some point, you can’t just coast off future potential any longer.
To be fair, Palantir has shown significantly better operating trends in 2020 than 2019. However, they’ll have to demonstrate operating strength for a lot longer than just a couple of quarters before we can discard with the possibility that the recent results are just a well-timed fluke to help bolster the opening price as PLTR stock started public trading.
In any case, Palantir clearly isn’t worth $23 billion at this point of its development. And, if my hunch is right, Palantir will report more disappointing results in 2021, and the stock price will plunge. Insiders were selling shares for as little as $4.17 each this summer. What do the company’s key employees know that the public doesn’t yet?
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.