Palantir (NYSE:PLTR) stock fell 13.8% last week, after a downgrade from Morgan Stanley (NYSE:MS). The dip marked a rare blip for the big-data analytics firm. Palantir stock has a one month return of 122.5% versus 7.4% for the S&P 500.
We are at the tip of the iceberg here with this one, and the latest sell-off is the icing on the cake for several retail investors that were hoping for a good price point to jump in.
A leader in the data analysis space and artificial intelligence, Palantir stock is the stuff that investor dreams are made of. Then why does Morgan Stanley analyst Keith Weiss think otherwise?
Well, he argues that the fundamentals aren’t there to warrant the kind of price action we see with Palantir stock. Also, he believes retail traders buying up shares from institutional investors is pushing the company to unrealistic highs. Weiss questioned whether Palantir is a “true software company” or just a “less desirable consulting firm.”
However, for me, the stock is a long-term play. Contracts are piling up. Its strong connection with the U.S. government is a source of strength and stability. And the company is spreading its wings toward the private sector. That should diversify its revenue pool and help reduce certain investors’ ethical concerns regarding its source of funds.
Competitive Edge
Palantir is not a data analytics company in the traditional sense. Its core “data OS” platform allows users to quantify and manage large pools of unstructured data. Why is this exciting? Well, the majority of the data out there is unstructured. It’s just that we haven’t figured out a way to manipulate that information yet.
That’s where Palantir comes in. It’s on the frontlines of the next data revolution. It’s not that Facebook (NASDAQ:FB), Google (NASDAQ:GOOGL) (NASDAQ:GOOG), and Amazon (NASDAQ:AMZN) are not working on similar solutions.
These companies have huge resources at their disposal but are also large conglomerates. They don’t have a niche focus like Palantir, allowing forward-deployed engineers to create a sustainable competitive advantage.
Not a One-Trick Pony
A lot of the criticism leveled against Palantir is that it’s heavily dependent on government contracts. While that is true, the software company is doing all it can to diversify its operations. Palantir’s $300 million five-year renewal deal is an example. Expect more such contracts moving forward since the pandemic has shaken up several industries to the core like cruise lines, airlines, and aerospace.
The situation is tailor-made for Foundry, a platform designed specifically for the commercial market. Companies at this point are desperate to save every last dime. An energy supermajor reported $57 million in cash savings after deploying the company’s ERP suite.
On the back of this performance, revenue shot up 52% year-over-year to almost $1.2 billion annualized. The more impressive metric is operating income, which swung to $73 million in the third quarter, up massively from a loss of $92 million in the year-ago period.
Now it may irk you when you see that Palantir stock is trading at 38.77 times forward price to earnings. But hear me out here. This is a company that is on the move and will only grow from here. Granted, investors are pricing that fact in, but this stock has the potential to be a game-changer, so outsized variations are expected.
Bearish Thesis
I fully understand the skepticism certain people have toward Palantir. Billionaire investor George Soros recently said he would sell Palantir stock when his lockup expires because of concerns regarding its customer list. Democratic lawmakers also expressed concerns regarding military spending, and with Joe Biden assuming the presidency, a cut could be around the corner.
On the other hand, do we want our government agencies to remain bloated and inefficient? The hardware supporting Palantir software will only improve with time. Meanwhile, Gotham has become the default operating system for data at some U.S. government agencies, giving it an additional competitive advantage as switching costs are high.
And let’s face it, if you are a large tech company, there will always be concerns regarding the use of data. That’s not to say Palantir should not take this into account. But ultimately, the policies that govern U.S. agencies are not set by private sector enterprise. We should leave those debates to the Congress and Senate.
Get Your Hands on Palantir Stock at These Rates
At this time, the share price of Palantir is too good to ignore. It has all the ingredients for success and has locked in several contracts that should provide it with a sustainable business stream. Leaving government contracts to one side, Palantir has roughly 6,000 companies worldwide to target with more than $500 million in annual revenue.
Palantir delivers a peerless customer experience, and at some U.S. government agencies is the “de facto” operating system.
Still, if you feel uneasy about investing in a company that doesn’t fit your ethical profile, I respect that. However, know this: Palantir stock is one of the most attractive plays out there.
The recent sell-off should give you one more reason to buy in.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan is a contributing author for InvestorPlace.com and numerous other financial sites. A former data journalist at S&P Global Market Intelligence, he’s passionate about helping retail investors make more informed decisions regarding their portfolio.
