Palantir Stock May Not Be a Great Short-Term Play, but Its Future Is Bright

When Palantir’s (NASDAQ:PLTR) Chief Executive Officer Alex Karp said that short-term investors should look elsewhere, it undermined ARK Invest’s recent PLTR stock purchase.

Palantir Technologies (PLTR) headquarters

Source: Sundry Photography / Shutterstock.com

Investors need to read the context before selling or avoiding PLTR stock. CEO Karp expressed frustration in Wall Street’s short-term thinking, not investment generally. Palantir’s long-term investments in building the product to sustain its growth is the key takeaway from that CNBC interview.

The hope is that the CEO’s warning will deter speculators while attracting the long-term investor. This will ultimately lower the volatility in Palantir shares.

Palantir has a “long tail” revenue model, meaning that contract wins will start small and get bigger over time. Supply agreements with the government, government agencies, the health sector, and manufacturers are examples of recent wins.

The revenue will grow slowly over time as customers validate the return on investment in Palantir’s Gotham, Foundry and Apollo products.

In the near-term, Palantir’s stock multiple will appear highly unfavorable. The stock trades at 40 times price-to-sales multiple. Its price-to-book ratio is 29 times and its forward price-to-earnings is over 100 times.

Investors would have to build a financial revenue model that has a timeframe of more than five years. For example, in this five-year Discounted Cash Flow EBITDA Exit model, the fair value is below $20. Palantir needs to grow its revenue by 70% in future years to justify the current valuation.

PLTR Stock Price Target

In the table below, the 9% discount rate assumption would reflect the CEO’s conservative near-term outlook:

Metrics Range Conclusion
Discount Rate 9.5% – 8.5% 9.00%
Terminal EBITDA Multiple 46.8x – 48.8x 47.8x
Fair Value $18.12 – $19.49 $18.79

Model courtesy of finbox

The EBITDA multiple of almost 50 times is a generous assumption that Palantir may achieve. Investors holding PLTR stock at current prices are taking a leap of faith that revenue growth will accelerate.

In the table below, readers may forecast a drop in revenue growth in the current and next fiscal year. This scenario would mimic slower contract wins in the short-term. Palantir would need to grow its sales force and technical staff to support its bigger customer base. In future years, the staff increase would pay off.

Revenue would grow in the 70% level next:

(USD in millions) Input Projections
Fiscal Years Ending 20-Dec 21-Dec 22-Dec 23-Dec 24-Dec 25-Dec
Revenue 1,093 1,472 1,907 2,861 4,864 8,269
% Growth 47.20% 34.70% 29.60% 50.00% 70.00% 70.00%
EBITDA -1,159 344 495 810 973 874
% of Revenue -106.10% 23.40% 25.90% 28.30% 20.00% 10.60%

“We told the Wall Streeters that we will focus on building the long-term health of our company, that we are going to invest in our product development and our clients, and you just have to battle it out with them,” Karp said.

Setting realistic expectations should take away the buying momentum. Investors with a time frame of at least five years need not heed the CEO’s warning. Instead, they may wait for the stock price to settle lower. That would offer a wider margin of safety.

On Wall Street, the average price target is $25.83. This is despite PLTR stock having more “sell” ratings than “buy” or “hold” recommendations, according to Tipranks.

Opportunity

Palantir’s core focus on expanding its profit margin will follow next. First, it needs to take care of its customer base. So far, customers are happy with the return on investment.

For example, this author cited the company helping an oil and gas customer save $57 million within weeks of the system installation.

On its website, the company showed how it helps customers transform data into decisions. Palantir is selling Supply Chain Control Tower to help customers that face disruptions in the energy, healthcare and automotive adapt to disruptions.

ARK Investment’s 3.4 million stake in Palantir is a vote of confidence. The fund has enough influence to draw copycat investors seeking to post similar returns to that of the fund manager.

Still, that purchase accounted for only 0.25% of the assets managed. Furthermore, investors could seek better growth opportunities in the software space. This would include Fastly (NYSE:FSLY), Alteryx (NYSE:AYX), and Splunk (NASDAQ:SPLK).

Each of the alternative software companies has issues of its own. Fastly depends too heavily on TikTok. Splunk’s subscription revenue growth is slowing due to competition. And Alteryx keeps issuing downside guidance in its quarterly reports.

Your Takeaway

Palantir is an investor’s favorite for whatever reason. The value investor may wait for that attention to fade away before considering it. Growth investors should hold and forget about it for a few years. Its prospects are still bright despite the CEO setting lower expectations.

Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.


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