Palantir (NYSE:PLTR) is growing quickly, but it’s still barely profitable. Analysts, on average, expect its earnings per share to come in at just 8 cents this year. The valuation of Palantir stock is sky-high and the company will likely face increased competition. Also, I continue to believe that a Biden administration could be somewhat hostile to the company.
Moreover, this is a time when state and local governments and to some extent, the federal government, will likely be strapped for cash. Thus, it’s unwise to buy the shares of a company that’s dependent on governments for a large share of its revenue. (Specifically, as of the first half of the year, 53.5% of Palantir’s revenue was derived from governments.)
Sky-High Valuation and Potential Competition
Palantir is trading for about 38.5 times analysts’ average 2021 revenue estimate for the company. That’s among the highest valuations I’ve seen for tech companies.
And yet, I believe that there’s a good chance that Palantir’s competition will greatly intensify going forward. The company specializes in creating data-analysis tools and helping its customers implement them.
Multiple other companies either create data analysis products or specialize in helping companies utilize such tools. For example, Splunk (NASDAQ:SPLK), Salesforce’s (NYSE:CRM) Tableau unit, and Alteryx (NYSE:AYX) are among the most prominent makers of data-analysis tools. And three of the largest companies that specialize in helping the federal government implement computer systems are Booz Allen Hamilton (NYSE:BAH), SAIC (NYSE:SAIC), and CACI (NYSE:CACI).
Some systems integrators also sell data-analysis products to governments. For example, Booz Allen’s Global4Sight product uses “advanced research tradecraft… [and] big data analytics to generate new insights for our clients’ missions.” Meanwhile, I’m sure Splunk and its competitors have engineers that help governments integrate their products.
So although Palantir is growing quickly now, eventually competition from other players – some of whom could also partner with each other and/or consolidate down the road – will likely cause its growth to radically drop sooner rather than later.
The Biden Administration May Not Be Favorable for Palantir
As I noted in my previous column on Palantir stock, “Palantir was founded by Trump supporter Peter Thiel, and the company provided profiling software for Immigration and Customs Enforcement, or ICE, which is viewed unfavorably by many liberals.” Consequently, I theorized that “Palantir’s mission is unlikely to be prioritized by a Biden administration.”
Last month, actions and statements by the asset management company founded by George Soros increased my faith in that thesis. Soros is a big supporter of Democrats and liberal causes. Specifically, the asset-management company, Soros Fund Management (SFM), reported that it had “sold all shares [of Palantir stock] that it is not legally or contractually obliged to hold and will continue to sell shares as permitted.”
It added that SFM ” does not approve of Palantir’s business practices” and had “made this investment at a time when the negative social consequences of big data were less understood.”
SFM’s sale of the shares and its criticism of Palantir indicate that liberals are not big fans of the company. Consequently, I’ll be surprised if the Biden administration spends a significant amount of money on Palantir’s offerings.
Limited Government Funds
In the wake of the coronavirus pandemic, the tax revenue of states and cities has dropped tremendously.
Meanwhile, even the federal government’s finances will be somewhat under pressure. Factors include the bail outs of states and small businesses, plus funding Biden’s ambitious initiatives.
In that environment, buying shares of a company that gets a large portion of its revenue from the government doesn’t seem like a good idea.
The Bottom Line on Palantir Stock
Palantir has a huge valuation, and its competition is likely to intensify as it grows. Meanwhile, Democrats appear to be hostile to it, and governments will have less money to spend on its offerings. Given these points, I recommend that investors sell the shares.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.