Hello Reddit. I’m here to apologize. I know it was paper-handed of me to tell you folks to cut your GameStop (NYSE:GME) losses at $70 and AMC (NYSE:AMC) at $7.50. But I was only trying to help you degenerates avoid losing money on an unwinnable bet – today’s GME short-sellers are far better prepared to withstand another short squeeze. So, to make it up, I’d like to tell you about a far different company: Palantir (NYSE:PLTR).
For some reason, Palantir one of the few companies you folks have fallen in love with that doesn’t classify as one of Warren Buffett’s “cigar butt” investments (BlackBerry (NYSE:BB) is the other that comes to mind). It’s a company that’s growing—and swiftly.
Unlike other r/WallStreetBets favorites, it’s now throwing off cash faster than it can spend it. As its salesforce continues to mature, you can expect this company to recover from its temporary dip.
PLTR Stock: A Quick History
In October, I wrote how insider selling of Palantir Technologies stock provides a golden buying opportunity. The first round of lockup expirations had driven the price of this secretive firm below $10. Those buying in would have been pleased. Since then, the company’s share price has ballooned. By January, the stock had reached a peak of almost $40. Call option buyers have walked away with small fortunes.
But then you degenerates forgot about Palantir. And quite frankly, so did I. On my part, Palantir’s price at $40 just started looking unexciting; its 53x price-to-sales ratio made it almost as expensive as DataDog (NASDAQ:DDOG), a super-charged cloud services company with even faster growth. And on your part, you were busy making money on GameStop while driving hedge funds out of business.
Now that Palantir is back down to $25, it’s time to revisit our favorite CIA tech company.
How Did Palantir Stock Drop 35%?
The troubles all started in early February when the company released worse-than-expected results for 2020. Revenue from government contracts rocketed 85%, but commercial revenue grew only 4% – extremely low for a supposedly high-growth company. We all knew that 2020 would be rough for business selling to enterprise customers. We didn’t think it would be this bad.
And then Thursday, an even larger round of insider liquidation suddenly hit the market. As 80% of the company’s shares became free to trade, insiders sent the stock back down to $25 – even lower than its $25.83 Wall Street analyst target price.
Insider liquidations of this size are rare. But much of this came from Palantir’s own doing when its top brass eschewed the typical underwriting process for a direct listing. Rather than spend millions on having underwriters drip-feed shares into the market, the company essentially decided to dump shares onto the market themselves in two big waves.
Reddit investors should sense an opportunity. It’s not often that insiders sell shares so quickly – and much of it is employees looking to diversify their holdings, not people just looking to cash out and run.
But here’s the rub: investing in PLTR stock still requires two things.
A degree of faith in its valuation. Palantir remains one of the most expensive tech firms in the world. Though its sticky business shows very low churn, PLTR stock still trades for a princely 54x EV-to-revenue multiple. That means Palantir will need to hit its lofty 30% growth targets to justify its price.
A willingness to invest despite moral issues. Palantir is no stranger to controversy. The company drew fire from the public for helping ICE deport undocumented immigrants, and even George Soros, an often-controversial figure, has offloaded his stake on moral grounds.
For a company that “knows everything about you,” it shouldn’t come as a surprise that not everyone will find their business palatable. But for those that do, then Palantir is a definite long-term winner.
Should You Buy PLTR Stock or Call Options?
Here’s where things get interesting. Though Palantir could eventually rebound to the $35 target price set by Goldman Sachs analyst Christopher Merwin, there’s no guarantee that this will happen before your call options expire. Many of Palantir’s staff are likely still holding onto their shares, waiting for a better opportunity to sell. That will make a short-term rebound to $45 far harder to achieve, no matter how much Reddit wants to oush. Instead, investors can expect Palantir to recover only slightly to $30 while insiders sell the stock they earned long ago. Put another way, stock is the way to play the short-term rebound.
However, if Palantir’s enterprise business regains steam later this year, its shares will start to rise quickly as insiders stop cashing out. The moment that happens, call options will suddenly become the right way to play this hot stock. Until then, you should stay patient. PLTR stock won’t stay in the $25-range forever, but its slow march to recovery will eventually get replaced by an even faster rebound if enterprise business roars once again.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.