Of all the hot software stocks since they became public, Palantir Technologies (NYSE:PLTR) is an investor’s favorite. PLTR stock does not have a high short float (at 7.2%). So if the stock is unlikely to attract bullish investors squeezing short-sellers, why do markets like the stock so much?
Palantir has a high share float at 1.06 billion. Insiders are now free to sell. After peaking at $45 last month, staff may want to get rid of some shares to diversify out of the company. Plus, if the Nasdaq sentiment worsens again, Palantir stock risks a further fall. It could fall back to its initial public offering price at $10.
PLTR Stock Fell Eight Straight Days
PLTR stock bulls tried to hold the $30.00 level at the end of Feb. but the Nasdaq’s weakness proved too much. The stock closed at $23.95 on Fri. March 5. The highly popular ARK Investment added a whopping 3.4 million shares on March 1. This will slow the stock’s drop but not end it. ARK had an exceptional 2020, so it gets plenty of attention. Still, ARK must buy Palantir because of the growing inflow of investor money.
Palantir has a strong long tail in revenue. That would describe its long-term revenue in the next few years. Because its software analytics product solves complex business problems, it has a high return on equity for customers. The bad news for short-sighted investors is that the installation requires hand-holding.
Palantir will need more specialist staff to help its customers with the complex installation. The Gotham product “will integrate, manage, secure, and analyze enterprise data.” Foundry will integrate data and Palantir Apollo will offer Power Software as a Service. Customers get all the necessary cloud-based solutions from one place.
IBM (NYSE:IBM) and Palantir announced a partnership last month. The news sent Palantir stock to a high ahead of the development but the Nasdaq’s sell-off ended that rally quickly. The partnership will consist of IBM’s hybrid cloud data platform alongside Palantir’s operations platform that supports building applications.
Customers will get IBM Watson, which supplies artificial intelligence functionality. Palantir and IBM named the product “IBM Cloud Pak for Data.” This product is available this month. In return, Palantir will implement IBM’s Red Hat OpenShift. That way, it will run anywhere in the hybrid cloud.
The partnership is fitting but nothing earth-shattering. The joint product will benefit customers in providing an easy-to-use solution. For example, the environment uses “no-code/low-code.” End-users may apply AI to make informed data-driven decisions.
Both firms have plenty of customers in financial services, healthcare, and government. IBM has many customers in the retail and telecommunications space. The deal will widen Palantir’s customer base.
Big Dip Ahead
Palantir faces tremendous selling pressure. Not only is the Nasdaq’s rebound short-lived but investors must absorb the insider selling. To rise from here, Palantir needs to announce bigger contract deals with government and healthcare institutions.
During the bubble for technology stocks in the last quarter, markets did not question the profit potential in small contracts worth under $100 million. But when Palantir posted a surprise Q4/2020 loss, it shook investor confidence. The company posted revenue of $322 million, offset by stock-based compensation costing $241.8 million.
Palantir forecast revenue growing by over 30% from last year for the full year 2021. For Q1/2021, revenue will grow by a sold 45% Y/Y. The adjusted operating margin will be 23%.
Above, Palantir has the worst quality and value score among its peers. Investors are leaping faith by ignoring the unfavorable valuations and poor profitability.
Its peers do not score all that well, either. This suggests that if the market continues to lose steam, driven by high valuations correcting, Palantir stock will under-perform.
Palantir is a solid long-term investment for those having a timeframe of at least three years. These days, three years is an eternity. The price paid matters for total return, so wait for the dip ahead to end. Establish a small initial position at first and accumulate shares over the year.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.