After breaking out of major resistance in August, Palantir (NYSE:PLTR) stock is on the way to topping its 52-week high. The Reddit favorite is attracting buyers after a recent deal with Wejo, a global leader in connected vehicle data.
Palantir’s alliance with Wejo is important, even though the deal will have limited financial value for Palantir in the near future.
The Deal Lifted PLTR Stock
Palantir will work with Wejo to develop an integrated data ecosystem for the automotive industry. Palantir’s entrance into that market has made investors more bullish on PLTR stock. Large companies, including Nvidia (NASDAQ:NVDA) and Tesla (NASDAQ:TSLA), work with autos’ integrated data. Their rich valuations justify the recent rally of Palantir’s shares.
Palantir’s Foundry platform will use Wejo’s data set, which collects over 16 billion data points daily from 11 million vehicles. Wejo has stated that it has already obtained over 10 trillion data points from 48 billion trips of connected vehicles.
As a result of the alliance, parts’ suppliers will get better insight into the quality of their components, and regulators will more fully understand autonomous driving. The companies said that they would also help cities invest in smart city infrastructure more effectively.
Sarah Larner, Executive Vice President of Strategy & Innovation at Wejo, said, “the partnership is accelerating the invaluable connected vehicle data insights we can give.” Currently, Wejo has plenty of data, but the company needs Palantir to analyze the information.
Investors seeking exposure to the automotive software-as-a-service sector should consider taking a bullish position in PLTR stock. The partnership will demonstrate Palantir’s value to the automotive industry, and it may lead to big contracts for the company with auto suppliers, automakers, and firms developing chips for autonomous vehicles.
In the second quarter, Palantir’s revenue jumped 49% year-over-year to $376 million, and its customer base grew 13% versus Q1. The growth of its customer base and sales should accelerate over the next year, as the Wejo deal will expand its addressable market.
Meanwhile, the U.S. military uses Palantir’s Edge AI, delivered through its Apollo product. For example, its technology runs onboard advanced military helicopters and boats used in special operations.
Due to the need to analyze Covid-19 vaccination programs, Palantir is becoming an important solution for healthcare companies. Palantir’s COO, Shyam Sankar, said that its overseas revenue is accelerating, as its healthcare sales grow.
Palantir is forward-thinking because of how it handles errors. Sankar said, “The old world, it’s fixated on the accuracy of the forecast. The new world is all about how well you manage the error in your forecast. Error is the signal, the error is the opportunity to win. Healthcare is never going to be the same.”
Palantir’s Foundry product will help companies transform industries and create new ones. For example, Palantir is collaborating with customers in the cell-based therapeutics and quantum computing sectors. As customers become familiar with Palantir’s cutting-edge technology, they will utilize its Foundry product more extensively.
Analysts are divided on Palantir’s fair value. The stock has three “sell” ratings and only one “buy” rating, according to Tipranks. Their average price target on the shares is only $24.00. Wall Street is probably uncomfortable with Palantir’s rich valuation. The stock trades at a price-sales ratio of around 40 times. Nvidia’s profits are higher, and the P/S ratio of NVDA stock is about 25 times. Salesforce.com (NYSE:CRM) stock reached 52-week highs recently, and its P/S ratio is in the low teens.
Palantir will need more than just hype and promises of future giant contracts to convince analysts to become bullish on its shares. Investors who view PLTR stock as overvalued should wait for the shares to fall before starting a position in them. Toi justify its current valuation, the company needs to exceed its full-year annual growth rate target of 30% or more from 2021 through 2025.
According to a five-year discounted cash flow revenue exit model, depicted below and based on a generous terminal revenue multiple of 14.5 times, PLTR stock is worth around $28 per share.
|Discount Rate||7.0% – 5.0%||6.00%|
|Terminal Revenue Multiple||10.0x – 16.0x||14.5x|
|Fair Value||$19.62 – $31.59||$27.90|
The Bottom Line
Palantir looks like a risk-free investment. The stock has low volatility, and many investors seem to be confident that the company’s contracts will be renewed at higher rates. As Palantir adds more customers in more markets, its potential revenue will increase.
Palantir is a software stock that investors should hold onto. Fortune 500 firms are noticing the company. Eventually, it will win deals with some of them. Until then, Palantir is poised to enjoy a healthy recurring business from its customers in the healthcare and military sectors.
On the date of publication, Chris Lau 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.