Overheated Palantir Technologies Stock Needs to Cool Before You Make Move
Palantir Technologies (NYSE:PLTR) is the gift that keeps on giving. The elephant in the room for me is the lack of profitability. But it’s not weighing down shares of the data mining company, with PLTR stock up 19.8% in the last month.
Since going public through a direct listing last September, Palantir has skyrocketed. There have been momentary blips, but the trajectory is upward.
However, have retail investors overheated the stock? At 33.24 times forward price-to-sales, I believe this is so.
Revenues continue to grow at an exponential pace. But at current rates, it’s best to pass on the stock for now and wait for it to drop a bit more before adding more to your portfolio.
To be sure, market sentiment on Palantir is decidedly bullish, and there is reason to be. Seldom a week goes by where the company doesn’t secure a new contract, or we don’t have an update regarding a strategic partnership.
Therefore, as a long-term investment, there is much to like about PLTR stock. If it pulls back, investors should buy more.
Employees Reap Rewards of PLTR Stock
The one area which comes up often when you speak to PLTR bears is stock-based compensation. Palantir is giving a massive amount of its shares to its employees. In the first half of 2020, 181,955 shares were distributed. In H1 2021, the figure rose to 426,473. Absent the stock compensation, operating profit in H1 2021 would be $233 million. Undoubtedly, the stock would have soared further had the company turned a profit by now.
Meanwhile, the number of outstanding shares has also shot up exponentially due to the stock-based compensation, leading to dilution. And considering the trend is not letting up, this issue will continue to give stockholders a headache.
But there is a flip side to the argument. Palantir’s employees are its main source of strength. The approach is in line with some of the other rapidly growing software companies that are using stock options to retain top talent. These are highly sought-after personnel, and since Palantir is successful, many will be receiving offers left, right and center.
The data-mining company would be in big trouble if a competitor swoops in and recruits its key engineers. To stop that from happening, Palantir is pursuing an aggressive stock-based compensation program. With stock awards, employees will work energetically toward overall company growth, so their shares will be worth more once they vest.
Although it will hurt shareholders in the short term, it makes sense when you take a long-term perspective.
Gold and SPACs
Meanwhile, two investment decisions have puzzled investors: Gold and special purpose acquisition companies (SPACs). Let’s talk about them individually and discuss the merits as to why Palantir made these decisions.
In August, Palantir spent $50.7 million on 100-ounce gold bars as part of its internal investment strategy. In an interview, COO Shyam Sankar said the move will help prepare for a “black swan event.” Physical gold is a hedge against inflation. Hard assets like gold hold intrinsic value due to their limited supply.
Yet, the amount of gold bought by the company is negligible. It remains to be seen whether there are plans to build up a large precious metal reserve. It’s a peculiar investment strategy, but I get the inherent logic behind the move.
The other area causing contention is Palantir’s investments in the SPAC space. Last year, these relatively obscure investment vehicles caught fire, with companies preferring to take the blank-check merger route rather than the traditional IPO to go public. Less paperwork and a relaxed regulatory environment were the main reasons behind this development.
Since Palantir went public in August 2020 through a direct listing, the company has invested heavily in the space to deploy its software to next-generation technology companies looking to make breakthroughs in their respective industries. This will help these companies get the most out of their core business and allow their employees and management familiarity with Palantir’s software.
Buy PLTR Stock on Correction
From an operating perspective, it is “all systems go” for Palantir. There is little to fault this enterprise on any issue. The only thing stopping you from adding more PLTR stock is the price point. Shares are trading at steep price multiples, and investors eager to accumulate these shares should wait.
However, monitor the news for a dip. That’ll be your opportunity to pounce.
On the publication date, Faizan Farooque 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.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.
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