Palantir (NYSE:PLTR) spent every day of last week’s shortened trading session in the red while the Nasdaq rose. The S&P 500 also closed up by almost 2%. The stark weekly underperformance in Palantir stock is not a good start for the hot software company.
After almost rewarding investors with a double return since its initial public offering, does the sudden dip create a buying opportunity?
The company will not report quarterly results until next month. Until then, contract wins and analyst reports will influence its share price.
The 6.64% bearish short float position against shares of Palantir does not explain the recent selling pressure. Investors may have decided to sell shares at close to their yearly highs to lock in profits for the year.
A Closer Look at Palantir Stock
Since the stock trades at unfavorable multiples, any hints of a market correction would send PLTR stock lower. For instance, the stock is valued at almost 200 times forward earnings. That assumes the infrastructure software company’s earnings per share will grow by at least 50% in the next year.
Palantir’s latest contract announcement is a positive development. The company said on Dec. 23, that it signed a new two-year contract with the UK National Health Service.
NHS will use Palantir Foundry to help it analyze Covid-19 infection data. It will look at how the virus is spreading and figure out the risks to the vulnerable population. NHS may manage its resources, responding to the analysis from Palantir Foundry.
This contract is worth only $31.5 million. Bulls will argue that winning the government contract will lead to additional deals next.
Palantir Stock and the Army Deal
The company also won a $113.8 million deal with the U.S. Army’s Program Executive Office for Enterprise information Systems (PEO EIS). The agreement is in addition to the $458 million agreement signed in December 2019.
Palantir will develop Army Vantage, a system that “provides a central operating system that enhances readiness and offers near real-time visibility and access to disparate Army data sources on an integrated data platform.”
Once again, the value of the contract may sound small. That should not concern shareholders. The military and government departments are on a tight budget. They must evaluate commercially available solutions at lower cost levels.
Palantir has a competitive advantage because its scalable software model will cost the lowest. It will continue to win more contracts from the government. As these customers add more data to the ecosystem, Palantir’s moat will widen.
Therefore, investors may ignore the unfavorable forward P/E metric associated with Palantir stock. So long as it continues to sign more deals, the stock has a good chance of trending upward next.
Fair Value
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Analysts are neutral to negative on Palantir’s stock price. The average price target is $14.50, which suggests a downside of almost 40%.
The price target ranges from $11.00 – $18.00, as shown in the chart.
Analysts from Morgan Stanley and Credit Suisse most recently rated the stock as a “sell.” Famed short-seller Citron Research tweeted about selling the stock in Nov. 2020.
Astute investors cannot rely on analysts or research from third-parties. For example, Citron told investors to sell Shopify (NYSE:SHOP). But Shopify is one of my bestpicks in 2020.
So, readers may forecast Palantir’s fair value with a five-year discounted cash flow EBITDA Exit model. Apply the metrics as shown in the table below.
| Metrics | Range | Conclusion |
| Discount Rate | 9.5% – 8.5% | 9.00% |
| Terminal EBITDA Multiple | 48.9x – 50.9x | 49.9x |
| Fair Value | $25.39 – $27.21 | $26.29 |
Click on the link to the model, above, and adjust the multiples as desired. If readers input a higher annual revenue growth forecast, then the fair value increases. At a 49.9 times terminal EBITDA multiple, Palantir is worth around $26.00.
Your Takeaway
Investor sentiment will create more volatility on Palantir’s stock in the next few weeks. Patient investors may wait for the company’s next quarterly earnings report before starting a position.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
