Palantir Technologies (NYSE:PLTR) debuted on the New York Stock Exchange last September via a direct listing. This allowed Palantir stock to start trading publicly without selling new shares like an initial public offering (IPO). The direct listing was unsuccessful at first; PLTR stock opened around $10 and stayed there for a bit. That might have been a surprise, as Palantir was one of the most-hyped tech unicorns in prior years.
However, Palantir shares sprung to life in November. In fact, PLTR stock tripled in a single month. During the short squeeze/Reddit excitement, shares hit nearly $40 in late January. Since then, though, shares have cooled off and lost half of their peak value.
Palantir: The Real Story
Palantir has long lived off its reputation for secrecy and clandestine data monitoring. After all, it received funding from the Central Intelligence Agency (CIA) to do security research for the government. Over time, Palantir added to its mysterious ethos. With rock star backers such as Peter Thiel, people always assumed Palantir was going to be a big thing. Then, we actually saw Palantir’s numbers when it filed to go public, and they were underwhelming to say the least.
For example, after 18 years in business, the company is still generating just $1 billion per year in revenues. That’s not terrible by any means. But it’s hardly the empire you’d expect for a company that generated so much buzz throughout the 2010s. Suddenly, it was clear why Palantir’s valuation in private markets had stalled out in recent years. Also, despite talk of it being an indispensable government contractor, Palantir did not make the list of even the top 100 U.S. defense contractors.
Additionally, just prior to the direct listing, insiders were selling stock for as low as $5 per share in off-market transactions. That’s not a good sign from a company expected to be a hot property. It also makes you wonder if shares have really jumped to nearly $20 in value in less than a year when insiders were willing to sell for far less.
The Problem: Narrow Market Adoption
Most software-as-a-service (SaaS) companies tend to base their business model on selling to a huge number of customers. Selling a license or subscription stream at, say, $1,000 per user over many thousands of users is often a successful strategy.
That’s not the only way software can be sold, though. Palantir takes a much different approach. It has a small number of customers and each of them spend a tremendous amount on the product. At year-end 2020, Palantir had just 139 clients, and a handful of them made up over half of the company’s revenues.
This isn’t necessarily a bad model. In fact, I own stock in C3.ai (NYSE:AI), which competes with Palantir in some regards and has similarly structured contracts. The issue is that Palantir has a market capitalization of $35.27 billion compared to $5.53 billion for C3.ai. So far, both companies are primarily niche software providers for artificial intelligence and big data. But Palantir is already trading at a mass market valuation, whereas C3.ai has more room to grow. If Palantir can’t figure out how to get a broader customer base, it will struggle to back up its current valuation.
PLTR Stock Verdict
Still, there’s a reason Palantir was perceived as a struggling business back when it was still private. The company simply hasn’t generated a lot of traction with its technology yet. A science fiction novel-type product and customer base only get you so far without tangible numbers behind them.
Much of the current enthusiasm for PLTR stock seems based on narrative rather than results. Some bulls, for example, point to Peter Thiel’s vocal appreciation of cryptocurrency as a sign that Palantir will eventually make big money in crypto. That’s possible, of course, but it’s a little early to be counting those unhatched chickens.
To be fair, Palantir has shown significantly improved metrics in recent quarters. If the company can keep on this new and improved trajectory, perhaps the stock will work out for investors. That said, after many years of slow growth and persistently weak profit margins, Palantir will need more than a couple quarters to demonstrate that it has turned the corner. I suspect that traders have gotten well ahead of the fundamentals in bidding PLTR stock up recently.
On the date of publication, Ian Bezek held a long position in AI stock.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.