Markets rewarded investors that bought Palantir Technologies (NYSE:PLTR) ahead of its earnings. Even though it posted a wider loss in the third quarter, PLTR stock benefits from high cash levels on hand on positive cash flow.
What growth prospects does PLTR stock offer and why is it a buy from here?
Higher Guidance Lifts PLTR Stock
Palantir raised its full-year 2020 revenue guidance to a range of $1.07 billion to $1.07 billion, up 44% year-over-year. It highlighted big contracts from the U.S. Army, worth $91 million, National Institutes of Health, at $36 million, and a $300 million renewal with an aerospace customer. The renewal is an impressive win, as it happened mid-pandemic. It is a reminder that Foundry is a core infrastructure in the operations of this aerospace firm’s business.
The tide is turning for the better in this sector. The Federal Aviation Administration signed an order that will lead to the eventual return of the Boeing (NYSE:BA) 737 MAX to commercial service. Boeing’s suppliers and partner aerospace firms will see a long-term benefit in the quarters ahead. As their business rebounds, Palantir has a good chance of winning more business deals and growing its margins.
The need to screen for Covid-19 and to take action to prevent a mini-outbreak from worsening is growing. The re-emergence of the pandemic this fall and winter in the U.S. and Europe will lift Palantir’s revenue. In July, the company ran an 8-week pilot with a customer to help them monitor a potential infection. The customer could annotate CAD-based models at their facilities. By integrating this data in its platform, the customer could predict if a specific area would lead to an outbreak or if it was driven by internal or external factors.
The customer already spent hundreds of millions of dollars on its supply chain and ERP systems. Palantir’s platform helped it get a better view of its supply chain.
Palantir’s recent contract win with a top-five pharmaceutical company would give shareholders indirect exposure to biotechnology exposure. Chief Operating Officer Shyam Sakar said on the conference call that when the customer leverages Foundry, it may “link and interrogate data across more than 2,000 clinical trials, including symptoms, diagnoses, and treatments, to unearth valuable findings.” Investors are investing in a software company that helps a pharmaceutical accelerate its clinical trial efforts by unearthing valuable findings.
Accelerating Growth Opportunity
Palantir has plenty of cash on hand to spend on research and development and to acquire smaller firms. For now, it is investing in the business. Already, the result in the third quarter was the closing of deals on new accounts. The stock rose post-earnings because markets are betting the 2020 full-year guidance increase of $133 million for adjusted operating income will come in higher.
Palantir will continue investing in its direct sales force, which already demonstrated strong performance. It will out products, just as it did with Apollo, a Power Software as a Service. This operating leverage will lift its top-line growth, outpace expense growth, and result in higher margins.
Wall Street is on the sidelines with Palantir. Five out of six analysts rate the stock as a “hold” with a $13.50 price target (per Tipranks). If they are right, one of the Stock Rover warnings of a 7.9% short float suggests a pull-back ahead. Still, bears bet incorrectly that the company would post weak quarterly results. Its stock-based compensation and related payroll taxes added to its $235 million operating expenses. With that out of the way and with bigger contract wins ahead, Palantir is signaling many quarters of growth ahead.
Investors starting a position today will pay more, after the over 80% monthly increase in shares of Palantir Technologies. Investors seeking a bargain will not find it with this software infrastructure stock. If the stock market corrects and Palantir shares fall, then it is time to buy.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.