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The Bear Thesis Against Palantir Is Rooted in Illogical Conclusions

There’s a lot of negative sentiment surrounding Palantir (NYSE:PLTR) stock. A good number of headlines will imply that the company hasn’t done well, or is suddenly at risk of implosion. 

A close-up shot of a hand and the Palantir (PLTR) logo.
Source: Ascannio / Shutterstock.com

Yet, when you dig into the numbers and strategy, Palantir looks like a strong company underpinned by growth. The argument against Palantir usually centers around its controversial nature and the concentration of its business. Palantir’s controversial nature is largely subjective of course. 

What I see when I dig into Palantir is a company that is improving and somewhat misunderstood. That’s why the bullish case for buying in at today’s low prices makes sense.

Longer Term

It’s easy to look at a given company’s stock and judge it by a slide in price or short-term negative news. Yet, when establishing a long-term, buy-and-hold position, it makes sense to consider a company’s performance on a year over year basis. 

And that’s a good place to start to understand why PLTR stock is now an opportune purchase. The company only recently had its IPO in late September, so let’s look at some recent years’ broad metrics for Palantir. 

Revenues, profits and margins are all improving at Palantir over the past few years. Investors shouldn’t get overly concerned that Palantir isn’t the largest defense contractor, or that Palantir has a business concentrated in that specific sector. 

So, back to those revenue, profit, and margin metrics. Palantir’s 2020 revenues hit $1.1 billion, up 47% from 2019 when it recorded $742.6 million in revenues. The company’s gross profit in 2020 was $740.1 million, up from $500.2 million in 2019. That means the gross margin grew from 67% to 68% between 2019 and 2020. 

Honestly, this broad growth is more indicative of a company that makes sense investment-wise. I’d argue that much of the negative sentiment against Palantir is from pundits who simply can’t or won’t see the forest for the trees. 

So, let’s look at the trees clouding their vision. 

Naysayers

An argument I read from prior to Palantir’s IPO stated: 

For investors, the most concerning might be its high customer concentration. Palantir said its top 20 customers accounted for 67% of its 2019 revenue, while its top three customers made up 28%. In fact, a single commercial customer accounted for 12% of its 2019 revenue. Losing any one of those major customers could have a big financial impact on Palantir’s business.

The argument relies on the idea that Palantir is incapable of maintaining the business relationship that it has forged in the private and public sectors. 

But that doesn’t hold up based on Palantir’s year-end 2020 report.

Government customer revenue increased by 77% between 2019 and 2020 at Palantir. $234.3 million of that $264.7 million increase was attributable to existing customers. Therefore, 88% of the government revenue increase came from existing contracts. This is a company that is providing services that its clients respect and will pay more for over time, not one in danger of losing customers. 

On the commercial side Palantir saw its revenues grow 22% in the same time frame. $59.7 million (69.9%) of the $85.4 million in revenue growth was from existing clients. Again, satisfied customers is the narrative I see here.

If Palantir is doing something wrong by expanding their business within the contracts they currently have, then what should they do? Would markets be more impressed if the company were to land clients only not to see their respective businesses grow on an account-by-account basis? 

Show me that Palantir’s business isn’t growing based on revenues, profits or some other meaningful basis and I’d be inclined to be bearish long term. That isn’t the case. 

Verdict

Bears are essentially arguing that Palantir keeps ingratiating themselves to those that they provide services for. However, Palantir simply continues to grow those businesses, and that’s somehow a bad thing?

Seems an odd argument to me. I think PLTR stock prices now are an excellent spot from which to establish a position.

On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. 


Article printed from InvestorPlace Media, https://investorplace.com/2021/04/the-bear-thesis-against-pltr-stock-is-rooted-in-illogical-conclusions/.

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