Since its initial public offering, Palantir Technologies (NYSE:PLTR) stock rose by around 60% following the company’s first earnings report.
At a $22 billion market capitalization, the company is similar-sized to other well-established software infrastructure firms. And since the Nasdaq composite is hovering at close to all-time highs, investors may not get to buy Palantir shares at a discount.
Palantir revealed many positives in its quarterly report but it may not be enough to justify its valuations.
PLTR Stock Benefits from Strong Guidance
In the third quarter, Palantir posted revenue growing 52% year-over-year. It also raised its guidance by forecasting revenue in the range of $1.07 billion to $1.072 billion for the full year. This is a 44% increase from a year ago.
The software firm, which builds enterprise data platforms to support the car, plane, and drug market, lost $853.3 million in the quarter. This includes stock-based compensation expenses totaling $846.96 million. If excluded, Palantir would have posted an operating profit. Next quarter, the stock compensation item will not be there. Plus, it is an expense that will keep the talent from leaving the firm.
Covid-19 is a positive catalyst for the company. The pandemic is forcing institutions to transform quickly to survive. Palantir is helping its customers do more with fewer resources. For example, an energy supplier deployed its Enterprise Resource Planning suite in hours. The customer saved $57 million and expects to make $1 billion annualized. In another example, an aerospace customer became Palantir’s biggest customer. It will get $300 million in revenue through a five-year renewal contract.
Opportunity
Palantir’s data computing solution is attracting customers across many major sectors. It is helping a pharmaceutical company uncover trends from population data. It signed a two-year, $91 million contract with the U.S. Army Research Laboratory. So, investors unwilling to invest in military and defense may instead buy the software company that supports the industry. Not only are margins higher but investing in the company is not morally wrong.
At its current market cap, investors could look at Okta (NASDAQ:OKTA), Splunk (NASDAQ:SPLK), or CrowdStrike Holdings (NASDAQ:CRWD) instead. But the valuations are just as high as that of investing in PLTR stock. So long as the company posts quarterly revenue growth of at least 50% Y/Y and increasingly larger new contracts, this stock is worth holding.
On Wall Street, only one analyst from Jefferies rates Palantir as a stock to buy with an $18 price target (per Tipranks). Five other analysts rate it as a “hold.” The average price target is $13.50, suggesting the stock has ~15% in downside returns.
Buy on the Dip
Investors who missed the pre-earnings run-up might want to wait for shares to dip. It will need a correction in the Nasdaq before that happens. Still, the market volatility may return at any time. Investors need to establish an entry price that is not too risky. At $10, the stock will make a round trip back to its IPO price. This would undo the speculative rally and give short sellers, who have a 5.12% short float on the stock, a chance to profit.
Conservative investors may instead look at Microsoft (NASDAQ:MSFT) or Oracle (NASDAQ:ORCL). These mega-cap firms trade at a more reasonable price-earnings ratio. That discount comes at a price, too. They are mature firms and their share price may offer no upside.
Palantir’s strong growth in the software-as-a-service is in the early phases. Next year, as the pandemic worsens, more companies will embrace online software solutions. Palantir will be more than willing to get customers set up on its platform.
Your Takeaway
Palantir is one of several software infrastructure stocks for technology growth investors. The positive post-earnings reaction is a bullish signal. Continue holding shares and accumulating the stock on any weakness. The stock could revisit the $10 post-IPO stock price but that is unlikely.
Still, on simplywall.st, the site estimates the fair value is around $12 based on the cash flow it is expected to generate in the future. Realistically, unless the Nasdaq falls, investors may only hope for a small discount.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
