Software company and Silicon Valley antithesis Palantir Technologies (NYSE:PLTR) stock remains divisive. Not only is it divisive, but the stock is fraught with a mix of tailwinds and headwinds.
Palantir has been trading publicly for only slightly longer than half a year. The markets are still trying to fully digest what to make of it. The bullish narrative is that long-term prospects will lead to Palantir multiplying in value in years to come. Backing by noted investors including Peter Thiel only serves to substantiate Palantir.
Yet, issues regarding work it has done for the government and CIA funding give it an aura of distrust. Then, there are issues concerning when, if ever, Palantir will truly live up to its billing. The company is nearly two decades old and arguably lacks the revenues it should by now.
Earnings Won’t Change Outlook
Investors continue to struggle to understand where Palantir stands, and what to make of it. May 11 earnings only served to paint a muddled picture. While there was plenty to celebrate, real issues remain. Therefore, there is no clarity to be gained.
By the broadest measures, it’s crystal clear that Palantir will continue to attract curiosity, but raise serious questions. That’s because while revenues grew 49% year-over-year in Q1, there was reason for concern. Palantir recorded a net loss of $54.27 million in Q1 2020. That net loss swelled to $123.47 million in Q1 2021.
When top-line results increase and bottom-line profits decrease at the same time, that indicates one problem: operational inefficiency. Palantir reports its operating expenses across three broad areas including sales and marketing, research and development, and general and administrative expenses.
Clear Issue
Sales and marketing were not the problem. Those expenses rose by 37%. That means Palantir spent 37% more to increase sales by 49%. That’s a strong result, and indicates the company’s sales and marketing efforts are heading in the right direction. R&D expenses increased by 49%, exactly the same rate by which revenues grew. R&D spending results take longer to bear fruit than sales and marketing expenses, so this is net neutral I’d say.
The clear operational issue is that of general and administrative expenses, which increased by 107%.
Perhaps the clearest way to summarize Palantir’s issues is by simply stating that while revenues increased by 49%, net losses increased 127%. This isn’t an uncommon occurrence in business. Nevertheless, it isn’t one that the market will reward Palantir for.
The market reaction since the earnings release has been mixed. The net result is that PLTR stock is trading flat. Some larger investors are taking a clearer position, including the largest public pension in the U.S.
Institutional Offloading
The California Public Employees’ Retirement System slashed its Palantir stock holding roughly a week after the earnings release. The largest pension fund in the U.S. by asset size more than halved its position recently. It sold 718,652 shares, which brings its PLTR stock position to 547,154 shares currently.
Large institutional moves tend to exert downward price pressure. However, Palantir prices have yet to move on the news.
Where will PLTR Stock Go?
I firmly believe Palantir is going to trade flat for a while. Wall Street believes shares warrant a $22 price, on average. Chris Lau’s EBITDA exit model suggests a slightly lower, yet similar number of $20.61.
Palantir, in an attempt to allay short-term fears, states that investors can expect “annual revenue growth of 30% or greater from 2021 through 2025.” That’s fine, but until Palantir figures out profitability, investors will remain mixed in their opinions and shares will trade flat at best.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
