Palantir Technologies Could Have an Unpleasant Surprise on This Week’s Earnings

There are two reasons why first-quarter earnings on Tuesday look key for Palantir Technologies (NYSE:PLTR) stock.

The Palantir (PLTR) logo on a grey wall.
Source: Michael Vi / Shutterstock.com

The first is that PLTR is sliding into the report. After being one of the beneficiaries of the “Reddit rally” along with GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC) in late January, PLTR has been nearly halved from its closing high.

Shares in fact are down more than 15% year-to-date and threatening to hit their lowest levels since November.

From that perspective, Palantir simply needs to give investors some good news on Tuesday — any kind of good news.

But the second is that Palantir still is relatively new to the public markets. The company only executed its direct listing at the end of September. Tuesday’s earnings release is just the company’s third so far.

Obviously, investors knew of Palantir before it went public. The prospectus filed with the direct listing included historical financial data.

Still, there are big questions that still surround Palantir — including exactly what kind of company this is. As investors review the Q1 numbers and listen to the post-earnings conference call, they’re going to have those questions in mind — and they’ll be looking for answers.

A Software Company or a Consulting Firm?

There’s one core question that is paramount for PLTR stock. Is Palantir a software company or a consulting firm?

It’s too simplistic to say that PLTR is too cheap if it’s the former and too expensive if it’s the latter, but there is some truth to that argument. Even after a pullback, and even backing out net cash, PLTR still trades for about 25x this year’s consensus revenue estimate.

That’s a software multiple, pure and simple. In fact, it’s a somewhat high software multiple. Companies in that ballpark include Snowflake (NYSE:SNOW), Datadog (NASDAQ:DDOG), and CrowdStrike (NASDAQ:CRWD)

It might seem ridiculous to question the operating model this way 18 years after the company’s founding, and obviously, Palantir does offer software. Most notably, its Foundry platform is the key to its go-to-market strategy going forward.

But the question is to what extent human intervention is needed to make the Big Data platform work. As New York magazine put it in an intriguing profile of Palantir last year:

Palantir, it turns out, has run headlong into the problem plaguing many tech firms engaged in the quest for total information awareness: Real-world data is often too messy and complex for computers to translate without lots of help from humans.

One quick-and-dirty way to answer this question is to look at gross margins. Not coincidentally, for Palantir they’ve been all over the place.

In 2020, excluding stock-based compensation (which was inflated by the direct listing), gross margins were 80.5%. The year before, they came in at just 71.1%.

Gross margins thus are going to be a point of focus in Q1. Another 80%-plus print would suggest that Foundry is doing what Palantir, and PLTR bulls, believe it can: cement Palantir as a top-tier software company. That in turn could lead PLTR stock to be revalued as such.

What Else Can Move PLTR Stock

Of course, investors will be looking at more than just one metric.

Revenue will be a point of focus. After the fourth quarter, Palantir guided for 45% year-over-year growth in Q1. That’s about in line with the 47% increase posted for full-year 2020.

Historically, most software companies guide conservatively (and as a result post beats relative to Wall Street expectations). So even after the pullback in PLTR stock, Palantir needs to hit 45% at least. It probably takes something closer to 50% to get investors truly excited.

That said, a big beat or miss is somewhat unlikely. Palantir serves most large-cap companies under large-scale contracts, and the company gave Q1 guidance halfway through the quarter. Its visibility toward quarter-end should have been quite clear.

That leaves earnings. Analysts are looking for 4 cents per share from Palantir, and here too a beat seems likely. But how Palantir drives a beat will be important (while a miss looks dangerous for PLTR stock).

Again, gross margins will be key, but the same is true for spending.

As an analyst noted late last year, Palantir’s operating expenses declined in 2020. Again excluding share-based compensation, sales and marketing spend dropped 23%, and research and development 14%. (General and administrative expense did increase 15%.)

The cut in spending seems strange given Palantir’s strong growth. The novel coronavirus pandemic may have played a role, admittedly. The more normalized environment of the first quarter should give some more color on this front.

All told, this is not likely to be a quarter where a beat on its own sends PLTR stock higher. Given the number of questions here, “how” might be more important than”how much?”

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


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