After the Nasdaq index lost 5.1% last week, Palantir’s (NYSE:PLTR) 17.6% drop doesn’t look so bad since PLTR stock is inherently more volatile than the index.
Insiders, free to sell shares as the lockup expired, had at least a little to do with the pullback, but it looks as if they have created an opportunity to get back on PLTR stock before it makes its next trip up. It will open today around $24, just a smidge below where it bottomed out as the lockup expired.
In the near-term, the stock will fight to hold the $25 level. This is a level it touched since late Nov. 2020. Where it moves next depends entirely on many factors.
PLTR Stock Dependent on Sentiment
As CNBC reported, the pace of the 10-year Treasury yield is spooking investors. The rising bond yields will compete with stocks.
Investors will have to choose between better risk-free rates and the increasing risks of holding expensive stock. Palantir’s surprising fourth-quarter loss overshadows the strong revenue growth and expectations ahead. Gone are the days when Palantir’s small contract wins drove the stock price higher.
In the full year 2020, the firm posted average revenue per customer of $7.9 million, up 41% year-over-year. Total revenue topped $1.1 billion, up 47% Y/Y. But at a $36.1 billion market capitalization, shares are trading at a trailing 32.8 times sales.
Investors could invest in Microsoft (NASDAQ:MSFT) or Apple (NASDAQ:AAPL) and pay just 11.6 times and 6.9 times P/S, respectively. This simplistic valuation comparison highlights how expensive Palantir shares are.
Growth investors are betting that the government contract wins will get bigger. Opportunities will broaden in 2021 and beyond, accelerating revenue growth. We’ll have to see.
Quarterly Loss
In the fourth quarter, Palantir posted revenue of $322 million, up 40% Y/Y. It lost $156.6 million from operations.
It also incurred $241.8 million in stock-based compensation, which is understandable. The company must reward its staff to prevent them from leaving. As the business grows, such costs will keep rising.
A shift to bearish sentiment will pressure investors to sell companies that are not making any money.
AAPL and MSFT stock rose last Friday, benefitting as risk-averse investors switched out of speculation and into the tried and true blue-chip stocks.
Speculators may become less patient waiting for Palantir to deliver on profits. It has a complicated product and requires staff expertise to get customers set-up properly. Still, the company has its foot in the door with the government.
Chief Operating Officer Shyam Sankar said that “with our investments in the end-to-end, sensor-to-shooter workflows from space to mud, we’re not just going after the roughly, $60 billion of government IT spend anymore, we’re talking about the quarter-trillion dollars of U.S. DoD weapons system spend in 2020.”
Palantir’s moat is how quickly a customer may deploy an end-to-end powerful solution. For example, According to COO Sankar, uses that would have cost millions of dollars and taking months may now be deployed in minutes.
Valuation
Wall Street analysts are lukewarm on Palantir’s upside. The average price target is $25.83, according to tipranks.
The stock has more “sell” ratings than “buy” and “hold” ratings.
Based on its net margin, return on invested capital, and gross margin, the stock scores a 15/100 on Quality.
Its closest peer scores a 49/100 on quality. So, if the peer companies have better quality and a negative margin of safety (downside price target), then Palantir’s fair value lower than its current price.
Investors must also contend with insiders selling 80% of their holdings. This includes Soros Fund Management, which held 18.5 million shares as of Nov. 2020. The fund signaled a willingness to sell shares, which will pressure shares.
Your Takeaway on PLTR Stock
Palantir is most definitely a great long-term holding for the patient investor. In the short-term, panicked markets will shake out weak hands.
Shareholders who worry about Palantir’s valuation and further quarterly losses will sell shares. In a few years, the install base in government and mega-cap companies will drive recurring revenues.
Investors should take advantage of the ensuing market panic to start a position in this company. Higher interest rates will pose a challenge to technology stocks trading at high valuations. Should bond rates fall, Palantir stock will recover.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
