Even the biggest skeptic would have to admit that Palantir Technologies (NYSE:PLTR) had an impressive 2020. The question, however, is to what extent that performance already is baked into PLTR stock.
Certainly, shares have pulled back, dropping by nearly half from late January highs, but of course, those highs were driven by the same Reddit frenzy that drove stocks like GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC) to brief and unsustainable valuations.
I thought the stock was overheated even before that when it traded at $28 in late December.
So at $23, PLTR stock isn’t necessarily cheap. After a strong year, and with more growth on the way, the question is whether it’s cheap enough. Personally, I’m still not convinced, though I’ll grant reasonable investors can see the story differently.
Not Just How Much, But How
The headline numbers for Palantir in 2020 certainly were impressive. For the full year, revenue increased 47% year-over-year. Adjusted operating profit was a loss of $335 million in 2019, nearly half of revenue. That reversed to a $104 million profit in 2020 at a healthy 17% margin.
That’s unquestionably good news, but how Palantir grew is just as important. Last year’s performance seems to support a number of pillars of the long-term bull case for PLTR stock.
For instance, Palantir was founded as a contractor for U.S. intelligence agencies. That market alone isn’t big enough to support the company’s current $42 billion market capitalization. It isn’t close. Palantir needs to keep expanding in the commercial market.
It’s doing so. Per the company’s Form 10-K filed with the U.S. Securities and Exchange Commission, 56% of 2020 revenue came from commercial customers. The figure was 53% the year before.
That in turn suggests that Palantir’s commercial revenue grew in the range of 55% for the full year. That obviously supports optimism toward the company’s potential on the commercial side. In fact, it’s a growth rate that’s among the best among SaaS (software-as-a-service) companies in the entire market.
Meanwhile, Palantir is driving that growth through a so-called “land and expand” model: landing new customers and expanding within existing ones.
Average revenue per customer was up just 41%, which suggests high-single-digit growth in the customer count even during the novel coronavirus pandemic. Average revenue at the top 20 customers increased a solid 34%; the number of $10 million-plus customers jumped 50%.
Is PLTR Stock Still Too Expensive?
So beyond the headlines, 2020 was an impressive year. With Palantir guiding for revenue growth over 30% in 2021, this year shouldn’t be terribly different.
But is that good enough?
After all, even after the pullback PLTR stock remains expensive. Assuming 35% top-line growth this year and even backing out net cash, the company still trades at about 27x revenue. Using the consensus Wall Street estimate for 2022, the forward price-to-earnings multiple still sits above 100x.
To be fair, valuation alone doesn’t make PLTR stock a sell. There are plenty of SaaS stocks with even bigger multiples.
Zscaler (NASDAQ:ZS) and CrowdStrike (NASDAQ:CRWD) both have higher revenue multiples. ZS and Varonis Systems (NASDAQ:VRNS) both trade around 280x forward earnings; a few large-cap software companies aren’t even expected to post profits in 2022.
Those specific comparisons aside, valuation simply hasn’t been a reason to sell quality growth stocks in this market. Even though PLTR stock clearly ran too far in late January and February, this is a quality growth stock.
The Same Questions Remain
That said, I personally would still like to see the stock get cheaper for two core reasons.
The first, somewhat counterintuitively, is precisely the margin strength Palantir posted in 2020. There simply isn’t that much room for improvement left. Some of the other SaaS stocks with triple-digit P/E multiples have those multiples because their margins are exceedingly low.
Palantir probably is looking at margins of at least 20% in 2021, given guidance for 23% in Q1. Those margins will continue to expand, but revenue growth will have to do much of the heavy lifting in driving bottom-line growth.
That requires a lot more work — and provides a lot less room for error. Palantir’s solutions are offered only to large businesses; the company itself defines its addressable market as firms with over $500 million in annual revenue.
Perhaps that changes over time, and perhaps the Foundry platform in particular is just that good. For revenue to grow exponentially, which is what the valuation countenances, it will have to be.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
