On paper, Palantir Technologies (NYSE:PLTR) was a name that while I wasn’t outright bearish on, I definitely struck a cautious tone. However, this market disdains such trepidation. Sure enough, Palantir stock has mooned since its direct listing.
But then again, this is a market that seems to have disconnected from reality, with stocks moving higher just because. Is that the case with PLTR?
Examining its business and the broader fundamentals, you wouldn’t think so. Specializing in artificial intelligence, Palantir stock was already deeply relevant prior to certain geopolitical rumblings. As a result, the underlying company has substantial implications for both military and commercial applications. But with tensions rising with China and Russia, PLTR has attracted speculative sentiment.
Just recently, we discovered that the Russians carried out what may be the most successful (and therefore devastating) cyber-infiltration of U.S. government and corporate institutions.
Presumably, the incoming Biden administration will take a hard look at the situation, not only from a preventative measure but also to deploy some payback. It’s possible, then, that Palantir stock could benefit from heightened government/military/defense demand.
But China is probably the biggest concern for U.S. intelligence. As Nikkei Asia reported, the Chinese have been flexing their muscle in the AI department, with its companies filing for AI patents at a prodigious rate. Further, I don’t believe these are token patents. Nikkei Asia stated in part:
By field, China’s clout grew in AI patents for e-commerce, data searches and language processing. Filings for image processing technology were particularly strong at 16,000, more than quadruple the filings in the U.S. The country is a leader in facial recognition technology that can match a person’s identity from an image of their face caught on video.
The latter tech is particularly impressive because roughly 92% of China is Han Chinese. And most of the other minorities, according to The Atlantic’s Marketus Presswood, are “visually indistinguishable from their Han counterparts.”
In other words, if China’s AI visualization can work in a homogenous population with similar phenotypic traits, it can easily work in diverse populations. This suggests we may be underestimating what our Chinese counterparts are capable of.
Palantir Stock and the Problem With Government
However, the threat from the Chinese can be read as an opportunity for Palantir stock. Such dangers from abroad incentivize the federal government to maintain AI dominance. Like we showed with the vaccination race, when Americans put their mind to it, the sky’s the limit to what we can accomplish.
While I don’t doubt the U.S. government’s motivation to stay number one, I’m questioning how reliable of a customer it is. According to Palantir’s latest quarterly filing, for the nine months ended Sep. 30, government-related sales represented 54.5% of total revenue, up from 47% in the year-ago comparison. Thus, if something happens to key clients in this category, Palantir stock could face volatility.
We have a similar parallel with Tesla (NASDAQ:TSLA). Though seemingly everyone’s in love with TSLA, many people may not realize that the company sells its vehicles at a loss. According to data from Trefis, without sales of carbon credits – which is a completely artificial market propped up by dubious governmental green policies – Tesla could very well be in the red.
To be clear, I’m not suggesting that Palantir stock is tied to an artificial market. However, it’s fair to point out that if PLTR’s success is going to be levered to the government, then we should consider Uncle Sam’s health. Unfortunately, I’m not liking what I’m seeing.
Currently, we’re in a situation where the 10-year Treasury constant maturity rate (nominal interest rate) is near all-time lows while the same index adjusted for inflation (real interest rate) is well below zero.
Under this circumstance, rational actors have more incentive to either spend money or move it to higher-yielding vehicles, such as stocks.
Of course, we’re seeing much of the latter but in terms of the former, the personal saving rate has ballooned to ridiculously high levels. And this shift to savings (i.e. deflation) is not just due to the novel coronavirus.
Indeed, from the fourth quarter of 2008 to Q4 2019, the nominal interest rate dropped from 3.86% to 1.79%. During the same period, the personal saving rate increased from 6.1% to 7.3% despite the incentive to spend money. That right there shows you the abject failure of government monetary and economic policy.
A Much More Pressured Name Than You Think
As a counterargument, if we do have a recession (or depression) as the above economic numbers indicate, the common-sense reasoning is that there’s no better client than a governmental client. But to address that point, the government can just as easily seek the lowest-cost provider of necessary services.
While Palantir stock is tied to some positive elements in the balance sheet, I’m not sure if the underlying company is built for a war of attrition in a commoditized environment. Therefore, I’m not gung-ho about it.
Still, from an objective view, it appears that my current pensiveness can once again get the better of me, at least in the near term. Palantir stock appears to be charting a bullish flag/pennant formation, which has significant upside implications.
Ultimately, then, PLTR is a short-term bullish trade. If you get the pop you’re hoping for, you get out. If you’re seeking longer-term exposure, I believe you can get a discount in the next few months.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.
