Palantir Technologies (NYSE:PLTR) is a data analytics company that serves the U.S. government. It has partnerships with several military and civilian federal agencies in addition to commercial customers. PLTR stock has enjoyed an impressive run since its IPO, rising from $10 to $35. In fact, the stock is up 251% since the IPO.
Big data analytics has remained a top choice for investors during the novel coronavirus pandemic and the company recently had a successful Demo Day. But although there’s plenty of hype swirling around the company now, investors should remain cautious.
This is especially true when you consider that the stock looks overvalued. Let’s take a deeper look at why PLTR stock looks overvalued and why you should consider avoiding it for now.
The Long-Term Picture Depends Too Much on Covid Developments
Palantir has generated traction due to the economic uncertainty and the pandemic. The government uses its services to check the spread of the virus and it is developing tools that will help the government with data related to the vaccines. However, with the availability of the vaccine, the growth from this catalyst might slow, with little reason to renew existing contracts when things become more “normal.”
PLTR stock bulls will point out several high-profile deals that the company has made recently as evidence to support the long-term case. However, a closer look shows that things aren’t that simple.
Despite the positive developments in the recent weeks, it is important to see how much revenue the contracts generate for the company in the long term and how many customers continue to stick with the company. Interestingly, Palantir remains heavily dependent on government clients compared to commercial clients. Four out of its seven most recent contracts are with the government.
This is a potential detriment because while the government tries to normalize the economy, there will be budget reductions for all agencies. If that happens, there is little that the company can do to secure its future in these initiatives. Add to that the point about its Covid initiatives already showing limitations and the case for PLTR stock isn’t as strong as some might argue.
The Demo Day and announcement of new partnerships have had a positive impact on the stock’s value, but this is typical for most companies in this situation. A company’s stock price typically rises when it beats revenue estimates or announces new partnerships. How long the price actually stays there is what matters to most longer-term investors.
Even if the above-mentioned contracts are considered, the company does not show many chances to generate profits in the coming year. In order to generate profits, the company needs to expand its commercial client base. When a company has a large commercial client base, it does not have to worry about its budget and it more easily attract additional customers.
The Bottom Line on PLTR Stock
As mentioned earlier, the company isn’t profitable yet and it may take a few more years for it to generate profits. Additionally, it is spending a lot of money on helping the government handle the pandemic with its existing contracts. Its net loss has more than doubled in Q3 2020 compared to the same quarter in the previous year. Although its year-over-year revenue increased by 52%, it is highly attributed to the government contracts rather than commercial sales.
Putting this all into a broader perspective, Palantir has been around since 2003, but it has not generated any profits. It has been in existence for nearly two decades and it only reached $1 billion in sales in 2020. As such, PLTR may have a number of government contracts under its name, but the valuation is hard to justify.
When you consider all of these elements, it’s clear that PLTR stock is trading at a premium compared to other names in the industry.
Its valuation of $62 billion looks stretched and the company still has to prove itself. Palantir will report Q4 earnings in the next few weeks. That will be a good time for investors to decide whether the company will be able to sustain its growth.
For now, I suggest that investors stay away from PLTR stock. If you intend to add it in your portfolio, wait for a dip as a buying opportunity.
On the date of publication, Vandita Jadeja did not have (either directly or indirectly) any positions in the securities mentioned in this article.