If you follow Formula 1 racing, you’ll know that the otherwise iconic Ferrari (NYSE:RACE) team suffered a horrid season last year. With the first round out of the way, 2021 looks much more promising, with the two cars bearing the prancing horse logo coming in sixth and eighth place. Possibly, Palantir Technologies (NYSE:PLTR) could have played an important role, given its data analytics partnership with Ferrari. Could this be a positive sign for PLTR stock?
Fundamentally, it couldn’t hurt. As InvestorPlace contributor Thomas Logue pointed out, the otherwise bullish writer noted that customer concentration is a “glaring” risk factor for PLTR stock:
“In 2019, the top 20 customers accounted for 67% of total revenue and in 2020 the top 20 customers accounted for 61% of total revenue. That’s an improvement YOY, but it still presents a significant risk. If the company were to lose any of those customers, revenue could take a dramatic hit.”
It’s also worth pointing out that PLTR stock is closely associated with the military industrial complex. As you know, that’s a controversial issue for many folks. However, it’s particularly pressing for young Americans. According to a Pew Research Center survey, U.S. adults under 30 years are less trusting of institutions, including the military, than older demographics are.
That’s an alarming dynamic considering how much effort American society expended to impart military worship among mere civilians who don’t do anything useful – except that little thing called paying taxes that make the military and other institutions possible.
I mention these controversial topics to illustrate how much it favors PLTR stock for the underlying company to branch out. In my opinion, Palantir’s partnership with Ferrari is a valuable one, not just for the revenue stream but also for the diversification of its image.
But will that be enough to get Palantir shares out of its present funk?
The Core Business of PLTR Stock Is Under a Pall
Despite the strong connection between Palantir and defense and military intelligence-related institutions, young buyers nevertheless bid up the heck out of PLTR stock earlier this year. Thanks to a strong following on social media, Palantir reached incredible heights.
While I don’t want to speak too quickly, it appears that the technical momentum for PLTR stock is fading. And that brings up two lines of thought. First, the bulls regard this as a long-term buying opportunity, which is Logue’s main argument. Second, the bears believe this is a “told-you-so” moment.
On the surface, it seems the bulls have a better argument. As I’ve mentioned before, President Joe Biden has a political incentive to bolster the military industrial complex. Every politician goes by the rulebook, when in doubt, military! Considering that the Democrats have the most tenuous hold of Congress possible, it’s everyone’s incentive on the left to wax poetic about the military.
Further, unfavorable views toward China are widespread in many Western nations. Therefore, it seems President Biden has an easy play to make, one which directly benefits PLTR stock. Unfortunately, I may have been too naïve in my prior arguments.
With recent provocative actions by North Korea, along with a global semiconductor crisis, other countries may recognize weaknesses within the Biden administration. Say what you want about former President Trump, but his raging style of leadership that offended many domestic officials also kept our adversaries in check.
If large swathes of the American people thought Trump was nuts, imagine how intimidating that was for foreign dignitaries. Simply put, President Biden doesn’t have the moxie that demands respect from bullies, that’s number one.
Number two is that we don’t hold all the cards. The semiconductor crisis illustrates just how disruptive outsourcing manufacturing can be. Thus, while we can speak softy (as our President often does), we don’t have the proverbial big stick.
Palantir Must Diversify or Risk Further Volatility
Put another way, the Biden administration must walk a tighter line than I previously thought. The military buildup option may not be as viable as an option for the White House, because the U.S. must also secure a stable relationship with China. Again, that’s what happens when you outsource critical infrastructure to foreign countries that from the get-go did not have a friendly posture to the west.
With China likely intent on using semiconductors as the new oil, they may be the ones carrying the stick, not us.
Additionally, the progressive arm of the Democratic party will want resources to support various social causes that have nothing to do with the military. Ideologically, the Biden administration may be the most embattled one because it’s getting pushback from all corners.
Whatever your opinions on the politics, all of this adds up to Palantir needing to diversify away from defense-heavy contracts. However, it seems that the technical weakness in PLTR stock reflects investor skepticism regarding the viability of a diversification rethink.
For now, I think investors are better served waiting on the sidelines. There may be more weakness to come.
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.