In light of stocks with the highest short float getting squeezed, Palantir Technologies (NYSE:PLTR) may get a slight boost. PLTR stock has a short float of 9.3% but investors should not treat the short-covering event as a positive catalyst that will last.
The company has a market capitalization of above the $45 billion range. About 1.65 billion shares are outstanding, too. If anything, volatility will rise for this stock, increasing the related option prices.
Investors more interested in holding the underlying shares should wait for the price to settle. Demo day and new multi-year contracts are the most recent events that matter more.
PLTR Stock Due for a Dip
Palantir shares could dip if analysts are justified in their caution. The average consensus rating is a “hold.” Notice the 31.8% sales growth lags the forward price-earnings ratio of over 100x. The P/E to growth (or PEG) is over 3x.
Palantir will need to continue posting bigger contracts to justify the current valuations. Chances are very high that the software firm will do that. No other software company offers the same product. The company helps its customers cut costs and dramatically accelerate revenue.
For example, in the third quarter, Palantir posted impressive customer additions. Global Head of Business Development Kevin Kawasaki said that one of its customers benefited from its Foundry modules and software-defined data integration. Using its enterprise resource planning suite, the customer had already saved over $50 million. It achieved this within a few hours of use.
Word travels fast. That incredibly quick return on investment is attracting more customers. On Jan. 28, the company announced a multi-year enterprise agreement for its Foundry Platform with Rio Tinto (NYSE:RIO).
Cyclical miners need data integration projects and digitization to transform the business. The mining and metals market is highly competitive. So, giant companies like Rio will need to operate more efficiently to survive. And as the pandemic continues, the company may optimize its value chains to maximize the safety of its staff and customers.
On Jan. 19, Palantir said it would provide Pacific Gas and Electric Company (NYSE:PCG) with its Foundry software. This will enable PG&E to have an integrated platform, giving decision-makers “a real-time, complete operational picture.” The deal is for several years and is in the multi-million-dollar range. This is the first U.S. utility customer for Palantir.
Downside Price Target
Only six analysts offer a price target on Palantir. According to Tipranks, the stock has a downside target of $18.80. Morgan Stanley’s analysts posted the most recent analysis on the stock, citing valuation concerns. Palantir’s 49% jump in the last month contradicts the analyst’s opinion. But if the indices lose momentum, investors may sell Palantir stock, too.
A drop in the share price would give investors who missed the $10 post-initial public offering entry price. A discount to that level is highly unlikely, though. The company’s product update on each of its platforms – Foundry, Gotham, and Apollo – will lift sales in 2021. Demos of the platform will attract commercial and government customers, too.
Palantir’s AI-based technology is not easy to implement. Its complexity will require more trained staff to support customers. The company will need to increase its operating expenses to hire staff as it wins more customer contracts. This will weigh on the near-term results.
Investors with a long-term view of Palantir’s prospects will watch the growth in recurring (subscription) revenue. Just as software giants like Adobe Systems (NASDAQ:ADBE) and Microsoft (NASDAQ:MSFT) post strong subscription sales each quarter, Palantir will eventually do the same.
PLTR stock has a solid moat in its platform and products. Patience will pay off for shareholders as the company continues to grow. When it reports quarterly results in the weeks ahead, management may raise its guidance. Government customers may increase their contract scope as their budget allows. Other software customers will lose business while Palantir takes on more work.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.