Beware What February Might Bring for Palantir Technologies

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Palantir Technologies (NYSE:PLTR), a provider of data analytics software platforms, is expected to report its fourth-quarter results in mid-February. Those who own PLTR stock might want to consider what this might mean for your investment.

Palantir Technologies (PLTR) headquarters
Source: Sundry Photography / Shutterstock.com

Here’s why.

Analyst Downgrade for PLTR Stock

On Dec. 18, Credit Suisse analyst Brad Zelnick cut his rating on Palantir to underperform with a $17 target price; it’s currently trading around $28 as I write this.

Zelnick has several business-related issues for his negativity on its stock.

First, its lack of a diversified client base — Investor’s Business Daily reports that 20 clients account for 60% of its revenue — could hurt it should future government contracts dry up.

Secondly, it’s got a lot of work to do to get its sales force up to speed to handle the needs of commercial customers who tend to move at a much faster pace than government agencies.

Lastly, its stock is getting expensive.

“We downgrade Palantir to underperform as we see valuation disconnected from fundamentals with the stock now trading over 50% above our previous blue sky scenario,” Zelnick said.

To be exact, it’s trading at almost 50 times sales. You can buy Nvidia (NASDAQ:NVDA) for 23 times sales. InvestorPlace’s Bret Kenwell recently included Nvidia in a list of seven tech stocks ready to rally higher. If you’re looking for a true business pedigree, Nvidia’s got it over Palantir by a country mile.

Ultimately, though, it’s something else that Zelnick mentioned that should have owners of PLTR stock thinking about the fourth-quarter earnings results.

The Impending Flood

Initial public offerings (IPOs) have what’s called a lock-up period where insiders are forbidden to sell their shares in the company for a specific number of days, usually 90 or 180 days, and sometimes longer.

Palantir went public through a direct listing at the end of September with a reference price of $7.25 a share. Unlike a traditional IPO, direct listings don’t sell any shares to the public; they merely allow existing investors to offer their holdings to interested buyers.

In Palantir’s case, it opened trading on Sep. 30 at $10 and finished first-day trading up 31% with 257.1 million shares trading hands.

The analyst believes that the expiry of Palantir’s lock-up period could lead to a tsunami of selling, knocking PLTR off its pretty little perch, up 293% through Dec. 22.

“About 80% of shares outstanding will be free to trade on the third trading day after fourth-quarter results,” Zelnick said. “We expect significant (Palantir stock) supply to come to market.”

While it’s not unusual for insiders to take some capital off the table, it’s a reality that investors ought to consider before the company releases its Q4 2020 results, which are expected in mid-February.

If you’ve made good profits on the stock and you’re worried about some of the things Zelnick’s concerned about, it might be a good time to cut and run.

The Bottom Line

In my most recent article about Palantir, I suggested that even though it was on track to generate annual gains of 1,386%, it still was an interesting buy.

However, my recommendation came with a couple of caveats.

First, you should only be buying its stock if you’re comfortable losing your entire investment. Remember, it won’t get to an operating profit until 2022.

Secondly, I felt as though it had gotten ahead of itself slightly, suggesting that you buy a half position and then wait for it to fall back into the teens. If Zelnick is correct, this could come in late February.

Bottom line: Palantir’s got decent growth ahead of it, and as I said in November, that’s got to count for something.

“I don’t think you can complain about the company’s growth over the past two years. In 2019, revenues grew 24.7% to $742.6 million from $595.4 million a year earlier,” I wrote on Nov. 3. “In the six months ended June 30, its revenues jumped 49.1%, almost double the growth rate for all of 2019.”

However, the lack of diversification and reliance on big government contracts does provide some long-term risk. That said, I do believe that Peter Thiel knows a thing or two about growing businesses.

Holding approximately 28% of the voting shares and about 20% of the 1.62 billion shares outstanding, the PayPal (NASDAQ:PYPL) co-founder has his hands firmly on Palantir’s rudder.

Just don’t be surprised if February brings a healthy dose of volatility.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2020/12/palantir-technologies-beware-what-february-brings-for-pltr-stock/.

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