Palantir Technologies (NYSE:PLTR) opens trading today with PLTR stock around $24, down significantly from its year-to-date high of $45.
I’ve written about the software-as-a-service (SaaS) company on two previous occasions in 2021. The first was in mid-January. Trading at $27, I argued it was a better buy in the high teens. On Feb. 9, I suggested that there were better growth opportunities given it was trading in the mid-to-high $30s and valued at more than 50x sales.
It feels good to know I was right to question its price on both occasions. Here’s why I’d continue to bide your time before getting into PLTR.
Buy PLTR Stock at $18
Palantir’s first day of trading was Sept. 30. It sold 257.1 million shares at $7.25. It closed its first day up 31%. Since its IPO, it’s up 200%.
If I told you that I had a stock to recommend that would generate a guaranteed six-month return of 200%, would you happily invest in that stock? And be happy with your return? The answer is yes and yes.
So, the fact that Palantir has come back from its high of $45 hit on Jan. 27 probably has some investors wondering whether its Gotham, Foundry, and Apollo products are the real deal.
InvestorPlace’s Chris Lau, a top-notch analyst, believes that Palantir’s long-term prognosis is excellent. Investors need to be patient. It will grow into its frothy valuation. The fact that Cathie Wood’s Ark Investment has bought 3.4 million shares should provide some comfort for those wondering when the recent bleeding will stop.
I say $18. Here’s why.
Palantir’s Current and Future Valuation
The company’s current enterprise value is $39.6 billion and 20.2x sales, according to Morningstar. I’m not sure how they came up with this calculation. Its 2020 10-K says it had 1.82 billion shares outstanding. Based on a $21.71 share price, that’s a market capitalization of $39.6 billion. Subtract $1.8 billion in net cash [$2.0 billion in cash subtracted by $198 million in debt] and you get an enterprise value (EV) of $37.8 billion.
In 2020 (Dec. 31 year-end], it had $1.1 billion in revenue. So, the trailing 12-month (TTM) price-sales ratio based on market cap and enterprise value are 36x and 34x sales, respectively.
In 2021, the analyst estimate for revenue is $1.48 billion. In 2022, it’s $1.94 billion. Based on the market cap, that’s 27x and 20x times sales, respectively. I guess Morningstar’s using projected 2022 sales for its P/S ratio. If you use EV, the ratio drops even lower.
My colleague mentioned three alternatives in the software space: Fastly (NYSE:FSLY), Alteryx (NYSE:AYX), and Splunk (NASDAQ:SPLK). The average P/S ratio of these three is 14.8. That doesn’t take into account their projected 2022 revenues. If it did, the gap between them and Palantir would be even greater.
For now, let’s just run with 14.8x sales.
If you apply a 14.8 P/S ratio to Palantir’s TTM revenue and 2021 and 2022 projections, you get market caps of $16.3 billion ($8.96 per share), $21.9 billion ($12.03), and $28.7 billion ($15.77).
Fastly, Alteryx and Splunk have three-year annualized revenue growth rates of 40.5%, 55.6%, and 35.7%, respectively. That’s an average of 43.9%. Conversely, Palantir had revenue in 2019 of $742.6 million, $1.1 billion in 2020, and projected to grow to $1.94 billion by 2022. That’s a three-year annualized growth rate of 37.7%, less than the trio of stocks mentioned above.
Let’s assume, however, that the next three years are kinder to Palantir than they are to Fastly, Alteryx, or Splunk. Based on $18 per share, we’re talking about a current market cap of $32.8 billion or 17x sales.
That assumes it will hit analyst projections while the trio’s growth will slow considerably.
From a margin of safety perspective, $18 seems like a much safer buy than $24.
The Bottom Line
Palantir is the Ark Innovation ETF’s (NYSEARCA:ARKK) 27th-largest holding with a weighting of 1.32%. That’s 27th out of 56th. This tells me Cathie Wood and company like where Palantir’s heading but aren’t ready just yet to give it a larger position.
Until she does, I’m not going to alter my feelings about Palantir. Buying PLTR stock in the teens is a much better buy than in the $20s.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
