“Cathy bought more” is what I heard the day after Palantir (NYSE:PLTR) reported earnings. PLTR stock rallied 10% on that headline last week. No, I don’t mean that the fact that Cathie Wood’s company Ark Invest bought more stock. The opportunity with this company stands on its own merit and will last for the long term.
This is a stock to own for years because of how well they are executing on plans. The fact that ARK added to their position is immaterial. They are following an algorithm, so it is silly for retail investors to try and copy that on a headline. It is like following a cooking recipe but with only a few ingredients we like. Investors are right to like it, but do so because it’s the right thing to do.
Palantir’s business model faces in two directions simultaneously. They cater to the government and the private sector and they are both thriving. Artificial intelligence (AI) is becoming more ubiquitous. In the future it will be a necessity for all businesses. Those who don’t use it will be at a disadvantage.
Currently, most companies consider it a novelty process. In reality AI improves performance of any level team. They say to err is human, so that’s how we can improve our chances with decision making automation.
PLTR Stock Will Thrive Behind Strong Execution
At the heart of the PLTR offering is the standardization of good thought process. The pandemic accelerated the digitization trends, so we now generate more data than ever. The ramp is exponential and it’s not transient.
What we do with the data will give companies advantages. Palantir helps aggregate and process the flow into actionable items.
Fundamentally, the financials metrics are healthy. It’s not cheap by any means with a 37 price-to-sales ratio (P/S). However, when a company is growing this fast, it has the right to overspend. In fact, it is a necessity if the team wants to deliver on its promises. Eventually the pace will bring the P/S metric down drastically. In February of this year, it was above 60.
Total revenues doubled since 2018. They still lose money but for now that’s not a concern. Too often experts complain about overspending. They did so with conviction in the case of Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) for years. Clearly they were wrong there and they will be wrong here.
Investor confidence these days is through the roof. But positive reactions to stronger earnings have been an iffy proposition of late. Luckily, PLTR stock popped on good news unlike what happened with Apple (NASDAQ:AAPL) just to name one. Investors acted rationally and they gave credit where due.
Palantir management grew total revenue by 49% from last year. They also generated $23 million in cash flow from operations. This allows them freedom to build on their momentum. There is no doubt that the business model is healthy and just needs time to get even more impressive.
Investors could not find fault in the report not even versus expectations. Often this is the area that causes negative reactions to strong score cards. PLTR stock passed with flying colors last week, and it will in subsequent ones.
Time Will Highlight Its Own Shine
The company has been around for years. The PLTR stock is new to Wall Street, and it will take time to earn more trust. Investors these days are fickle but they will recognize brilliance eventually. The natural flow of interest suffered a blow when Palantir fell into the slip stream of the meme stocks. In January it rallied 70% with the likes of GameStop (NYSE:GME). This will take time to work itself out of the charts.
Technically PLTR has support below near $23 per share. This is the halfway mark of its entire public life. When a stock rallies fast, it’s OK for it to give back half the rally. Eventually the price action will normalize and set a clear buy-able base.
Meanwhile, I trust that as long as markets remain bullish, it will too. But to build a buffer I would rather sell December $21 puts and collect a premium. This would makes bull PLTR price action with a 20% margin of error. In that case, I wouldn’t start losing money until price falls below $19.80.
However the method investors choose, they should leave room for error. If not by using options, then by not taking full positions all at once. Regardless of the good story that PLTR tells, it has to trade inside the whole collective. At these altitudes the indices are susceptible to sharp surprise corrections.
On the date of publication, Nicolas Chahine 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.
Nicolas Chahine is the managing director of SellSpreads.com.
