What a difference an election makes. Prior to the U.S. presidential election, few on Wall Street were excited about Palantir (NYSE:PLTR) stock. But, once the results came in, investors chomped at the bit to bid this big data company higher. Shares have soared nearly 40% percent since Nov. 4.
In retrospect, this shouldn’t be a surprise to anyone. Sure, with this company’s ties with the Trump administration, the specter of his challenger (Joe Biden) winning made many concerned that the company’s massive federal government business would be affected.
Sure, Palantir does have ties to the Trump administration. But it may have deeper ties with the tentative Biden administration. As InvestorPlace’s Chris Markoch wrote Nov. 11, don’t forget this company made its bones during the Obama years.
But that may not have been the only reason shares soared in the past week. Many could have dived in ahead of the company’s quarterly earnings, which were released Nov. 12. Top line numbers knocked it out of the park. However, the company has yet to become profitable. Guidance points to positive operating profits in 2021. Yet, given that profitability challenges could continue, this is hardly a guarantee.
So, after its strong performance as of late, should you dive in? With enthusiasm growing around this name, it could go higher. But tread carefully, as potential non-political headwinds may reverse the near-term gains from its political tailwinds.
There’s More Than Politics at Play With PLTR Stock
At first glance it seems the recent strong performance of Palantir is due to the news of a Biden victory on Election Day. Yet, as Barron’s reported Nov. 12, many may have been buying shares hand-over-fist in anticipation of a blowout quarter.
Yet, while the top line came in strong, but the same can’t be said about the bottom line. Quarterly revenues of $289.4 million beat guidance of between $278 million and $280 million. And, while the lion’s share of growth came from the governmental business (68% year-over-year increase), its growth with its commercial customers (35% year-over-year) wasn’t bad, either.
However, profitability remains a work in progress. Quarterly losses widened compared to the prior year’s quarter. Of course, much of this had to do with stock-based compensation in conjunction with its recent IPO.
Yet, even excluding this one-time expense, Palantir still showed a quarterly loss. Sure, with news of massive new contracts (both governmental and commercial) in the pipeline, the company may meet its guidance in the coming year, and post positive operating income numbers.
However, while it seems inevitable this fast-growing company will hit profitability, many have made the case losses won’t swing to profits anytime soon. And, if the company fails to deliver on its promises, shares could take a big hit in the coming months.
The Jury’s Still Out on Future Profits
A few weeks, I wrote a cautious take on PLTR stock. In the article, I discussed the many risks on the table with this controversial big data play. Setting the political risks to side, I focused on the other factors that could send shares lower in the near term.
Namely, the prospects of this company finally going from losses to profits. As our own Mark Hake pointed out last month, government watchdog scrutiny may make it tough for Palantir to turn its governmental business into a cash cow.
That leaves the commercial business to fill the void, and help the company live up to investor expectations. But some have concerns whether the company can build up a sufficient customer base in the private sector.
Adding it to their “Best Idea Short List,” Hedgeye (which is short PLTR stock) sees big downside for the company, mainly for this reason. Per their argument, the company has yet to get traction in the enterprise space, despite being in business for 17 years.
Granted, as seen from the recent earnings release, an unsuccessful past doesn’t rule out success in the future. But, as positive earnings remain on the horizon, this company still has much to prove to investors.
On top of this are concerns over valuation. That’s what was behind Morgan Stanley analyst Keith Weiss’ recent downgrade of the stock. While his downgrade includes a raise in his price target ($15 per share vs. $13 per share before), it’s possible the recent rally means less potential for additional gains in the near-term.
Tread Carefully, as the Post-Election Boost Continues
Sure, given I agree with those skeptical of the company’s profitability prospects, you may assume I’m bearish on the stock. That’s not quite the case. Sure, after the stock’s nearly 40% rise since after election day, diving in now doesn’t look like the best move.
Yet, as investor excitement remains high, I wouldn’t bet against it. So, what’s the play now with PLTR stock? Tread carefully, or wait for a pullback, before entering a position.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, contributor to InvestorPlace, has written single stock analysis since 2016.
