Since nearing $30 at the end of November, Palantir Technologies (NYSE:PLTR) lost its momentum for the next two months, with PLTR stock trading in a tight range around $25.
All of that changed on Friday, however, as the shares rose by around 20%. And yesterday, PLTR stock gained another 11%, closing at $36.23 and rewarding patient investors.
What sent the stock so high and so fast? Are investors buying the stock in anticipation of new contract announcements by Palantir?
PLTR Stock Breaks Out of Its Range
Investors were previously hesitant to pay a meaningfully higher price for Palantir. That was understandable because the company could not hope to excite investors with relatively small deals.
For example, the company announced a contract with SOMPO Holdings (OTC:SMPNY) worth $22.5 million on Jan. 4. Even if Palantir had won a $250 million deal, the shares would not have responded much, since the company’s market capitalization was $45 billion.
In its press release announcing the one-year SOMPO deal Palantir stated, “SOMPO’s RDP objectives will accelerate the digital transformation of Japanese commercial and governmental institutions, and create connected infrastructure across key industries.”
So the win will enable Palantir to enter the healthcare and automotive markets in Japan. Because companies in the region appreciate “real data” analysis, Palantir has a good chance of obtaining more Japanese customers.
Fair Value: Discounted Cash Flow Method
In a 5-Year DCF Model: Gordon Growth Exit, investors may assume that Palantir’s revenue will grow at least 75% annually.
| (USD in millions) | Input Projections | |||||
| Fiscal Years Ending | 19-Dec | 20-Dec | 21-Dec | 22-Dec | 23-Dec | 24-Dec |
| Revenue | 743 | 1,299 | 2,274 | 3,980 | 6,964 | 12,188 |
| % Growth | 24.70% | 75.00% | 75% | 75% | 75% | 75% |
| EBITDA | -541 | 179 | 416 | 806 | 1,759 | 3,383 |
| % of Revenue | -72.80% | 13.80% | 18.30% | 20.30% | 25.30% | 27.80% |
Unfortunately, based on these metrics, the stock’s fair value is $23.56, as you can see below.
| Metrics | Range | Conclusion |
| Discount Rate | 9.5% – 8.5% | 9.00% |
| Perpetuity Growth Rate | 3.5% – 4.5% | 4.00% |
| Fair Value | $20.18 – $28.61 | $23.56 |
Simplywall.st estimated Palantir’s cash flow in the future and determined a fair value of $20.60 for the shares. So investors who are keen on buying stocks at a reasonable valuation multiple will want to avoid Palantir at these levels.
Opportunity
The company is in a good position to announce sizable contracts with the government and healthcare entities around the world. As governments spend more money at the beginning of the year, Palantir is bound to win bigger contracts, like this $114 million partnership with the U.S. Army. And Palantir is likely to beat its competition going forward, causing its revenue growth to accelerate.
Palantir’s existing government customers will likely renew their deals with the firm. When the company reports its quarterly earnings next month, look for management to update its guidance.
More recently, the firm announced another contract with the U.S. Army that could be worth up to $250 million. In the first phase, the company will receive $8.5 million.
In the initial part of this deal involving the Army’s Ground Station Modernization project, Palantir will design and demonstrate a prototype. Palantir said the “solution will leverage space, high altitude, aerial, terrestrial sensors and data sources for use in intelligence and military targeting operations.”
Assuming the U.S. government increases defense spending, Palantir will benefit from projects involving the analysis of data related to intelligence and military targeting operations.
Ignore Palantir’s Unfavorable Stock Score
Palantir’s value score is below that of the industry and the widely followed S&P 500 index, as you can see below.
The stock’s quality score is very poor because of the company’s lack of positive operating margins, as shown by the chart below.
| PLTR | Industry | S&P 500 | |
| Quality Score | 15 | 54 | 79 |
| Gross Margin | 69.00% | 68.30% | 28.90% |
| Operating Margin | -58.90% | 26.40% | 12.30% |
| Net Margin | -59.30% | 21.60% | 7.50% |
Optimists should assume that Palantir’s growing revenue will enable its gross margin to expand. That would lift its quality score above the industry average.
From the above chart, investors may find many alternative companies with higher growth scores.
The Bottom Line
Palantir’s recent wild swing gave traders a chance to take profits. Its fair value is considerably lower than the stock price, implying declines ahead. However, after Palantir announces bigger contracts in the weeks ahead, the risk posed by PLTR stock will drop.
In the near-term, the stock will continue to be volatile. But patient owners of the shares will be rewarded in the long-term as this company proves its worth.
Few other software firms have the growth potential that Palantir offers. And if the technology sector weakens, PLTR stock is a good name to buy on weakness.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
