Is Palantir (NYSE:PLTR) a safe investment? This is the essential question that investors have been trying to answer since the shadowy software company that specializes in big-data analytics went public on Sept. 30 of last year. And it’s fair to say that PLTR stock has sent mixed signals since its market debut.
After entering the New York Stock Exchange at $9.50 a share, the stock languished until late November when it began rallying, eventually rising more than 200% to a high of $33.50.
However, the share price has fallen 25% in recent weeks and seems to be stuck around $25 a share. Even at current levels, many analysts say Palantir stock looks to be overvalued. And many investors remain concerned about the company’s work on heavily guarded U.S. federal contracts in the areas of surveillance and national security, areas that Palantir is expanding in.
Here, we unpack what’s going on with PLTR stock.
Lock-Up Period Expiration
Part of the reason that PLTR stock has been slumping in recent weeks is that the lock-up period related to its initial public offering (IPO) is set to expire in mid-February. The lock-up period prevents company insiders from selling their holdings of Palantir stock for a set period of time.
When the lock-up ends in February, those insiders will be free to sell their holdings, and that could increase the supply of stock on the market. Retail investors could be looking to sell their shares before the lock-up period expires. Other investors could be taking profits after the stock’s big run in November and December.
Other issues that could be weighing on PLTR stock include the transparency of its government contracts related to national security. Some media and critics claim that Palantir helps the U.S. government spy on its citizens. (There are even reports the company helped locate Osama Bin Laden.) While those claims may not be true, they have conspired to hurt the company’s reputation and given pause to some investors.
Also, much of Palantir’s growth comes from helping governments and other clients navigate economic and geopolitical risks and uncertainty. Last year, with a global pandemic raging, was very good for Palantir’s data-analytics business. However, as we put the Covid-19 pandemic in our rearview mirror, the growth prospects for Palantir in 2021 remain less clear.
Additionally, some analysts have claimed that Palantir is too focused on government work, grumbling that the company’s products don’t scale as easily as other Software-as-a-Service (SaaS) companies, which could also hurt its future growth.
On the flip side of the coin, Palantir’s business has been performing well since its IPO was launched at the end of September. The company has announced a new two-year contract with the U.K.’s National Health Service that’s worth $31.5 million and renewed a contract with the U.S. Army that is worth $114 million.
Additionally, Palantir has reported some strong earnings results. For the third quarter of 2020, Palantir’s revenues rose an impressive 52% year-over-year. Revenue from government contracts was up 68% year-over-year, while revenues from commercial businesses increased 35% on an annualized basis. Palantir’s gross margins were 72% in the first half of 2020.
Palantir also has a large addressable market in front of it. The company’s estimates put that market at right around $120 billion. And Palantir has an impressive track record of securing contracts with governments around the world — most of which are multi-year, multi-million dollar arrangements.
Buy PLTR Stock
Right now, there’s no shortage of Palantir bears. In recent weeks, analysts at Citigroup (NYSE:C), Credit Suisse (NYSE:CS) and Morgan Stanley (NYSE:MS) have each downgraded PLTR stock. But are these bears taking a long-term view of Palantir?
Much of the current weakness is due to the coming expiration of the IPO lock-up period and profit taking. Looking out six to 12 months, Palantir’s business is doing well and its prospects are bright. The people behind the company have a proven track record.
For these reasons, PLTR stock should be able to survive the naysayers and perform well in 2021 and beyond. Investors should view the current pull back in PLTR stock as a buying opportunity.
On the date of publication, Joel Baglole held a long position in FB.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.