Palantir (NYSE:PLTR) tumbled 12.75% to $27.84 per share on Feb. 15. The reason was the announcement of fourth-quarter 2020 earnings, which were mixed. PLTR stock in the past five months managed to gain about 400% from the closing price of $9.50 on its first trading day (Sept. 30, 2020) to a 52-week high of $45.
PLTR stock has even managed to become a meme stock, which partly explains its price surge.
But let’s dive into the latest earnings report. What does this tell us about PLTR stock?
PLTR Stock: Key Risks
In January, I wrote an article about Palantir and the 10 Key Risk Factors for 2021 and Beyond.
The No. 2 reason was the “Risk of Unsustainable Revenue Growth.” Specifically, I wrote, “But is this growth and momentum for revenues sustainable? Any earnings miss or slowdown in this revenue growth can add selling pressure to the stock.”
Was this nearly 13% drop in stock price attributed to a slowdown in revenue growth outlook? The answer is yes.
In December 2020, I wrote “Palantir stock may have soared in 2020, but there are several fundamental reasons to avoid it.” The three key reasons were valuation, specific stock risks and stock financial performance. Are these key risks still relevant? The straightforward answer is again yes.
Highlights to Focus on
Palantir’s fourth-quarter 2020 earnings were mixed. The good news was that both earnings and revenue topped estimates as the company closed several large deals. But the main reason why Palantir stock fell was that its full-year 2021 revenue guidance came in slightly below expectations.
For full-year 2021, Palantir said it expects revenue growth of greater than 30%. But there are two negative things to consider here.
First, the analysts were expecting for 2021 revenue growth of 31%. Yes, the miss seems to be a very slight one. But still, it is a miss. What is more important though is the fact that this expected revenue growth represents a significant slowdown from the 47% revenue growth of 2020 compared to 2019.
Now there is a tendency for most publicly traded companies to be rather optimistic on their financial projections. And although Palantir said it expects revenue growth of more than 30% for 2021, financial analysts, including myself, interpret this as it will be probably less than 2020 growth. And a slowdown in revenue is never a positive fundamental factor.
The 4Q 2020 Palantir earnings report was mixed with good news and bad. The software company reported a surprise fourth-quarter loss, even though revenue rose more than forecast. Palantir reported a net loss that narrowed to $148.3 million, or 8 cents a share, from $159.3 million, or 29 cents a share, in the year-ago period. These losses included $241.8 million in stock-based compensation and $18.9 million in employer payroll taxes. The FactSet consensus was for a profit of 2 cents a share. Revenue rose 40.4% to $322.1 million, beating the FactSet consensus of $300.7 million.
What about the year-over-year key financial metrics? This is where my investment thesis is still valid as the company increased its revenue, but at the same time widened its net loss. Something is wrong here.
Revenue of $1.09 billion in 2020 turned to a net loss of $1.166 billion or a net loss per share attributable to common stockholders, basic of $1.19. For 2019 the revenue, net loss and net loss per share attributable to common stockholders, basic were $742.5 million, $579.64 million, and $1.02 respectively.
So the net losses widened despite a 47% hike in revenue. Speaking with facts and not opinion, this is not good for valuation purposes. Another key highlight to consider is that for 2020 net cash used in operating activities was – $296.60 million, worse than the -$165.21 million in 2019.
The majority of cash made was due to financing activities, not the core operating activities.
Remains Too Expensive
Now not all things are negative for Palantir. The company has announced “new contracts in Q4 2020 which include businesses and federal government agencies.
Furthermore, the company expects Q1 2021 revenue growth of 45% year-over-year. And the average revenue per customer was $7.9 million, up 41% year-over-year. The average revenue from its top 20 customers was $33.2 million, up 34% year-over-year.
There have also been announced several important business developments, such as the partnership with IBM (NYSE:IBM) to deploy artificial intelligence applications focusing on data related to hybrid cloud environments.
PLTR Stock Verdict
There have been several developments that clearly show Palantir is working to find its competitive edge. But to me, the fundamentals show that it is too early for the expectations to turn to viable and consistent profitability. If sales growth slows significantly in 2021 compared to 2020, then most probably the company will be unprofitable in 2021. And yet the expectations of about $4 billion to $5 billion of revenue until 2025 remains optimistic.
For now, I do not see any improvement in key financial metrics such as profitability. It got worse. Losses widened. My investment thesis remains the same: the stock is highly-priced, with key risks ahead. I do not find a solid financial argument to buy the stock.
On the date of publication, Stavros Georgiadis, CFA, did not have (either directly or indirectly) any positions in the securities mentioned in this article.