Many investors, analysts and pundits are finally seeing and internalizing the multiple weaknesses of Palantir Technologies (NYSE:PLTR) that I have identified for many months. As they come to a sobering realization, I think that all investors should sell PLTR stock and that some traders should consider shorting the shares.
For the first time, many on the Street and in the media are discussing the company’s bottom line struggles, its vulnerability to losing government contracts and the frothy valuation of PLTR shares. Over roughly the last year, my columns have provided ample warning about all those issues.
Before too long, I believe that many will, like me, wonder whether the company’s alleged technical superiority, touted by its management and ARK Invest’s Cathie Wood, is nonexistent.
Q3 Results Were Typically Problematic for PLTR Stock
As usual, on the surface, Palantir’s third-quarter results looked good, even impressive. Revenue in the period climbed 35.5% year-over-year to $392 million, beating the analysts’ average outlook by $5.54 million. Its earnings per share, excluding certain items, came in at 4 cents, which was in-line with analysts’ average outlook.
And, most impressive of all, it raised its 2021 revenue growth guidance to 40% from 30% and increased its outlook for adjusted free cash flow over $400 million, up from in excess of $300 million.
But as usual for Palantir, there was a pile of problems underneath the surface.
First of all, as usual, the company issued a great deal of stock-based compensation (SBC); according to the company’s “Condensed Consolidated Statements of Redeemable Convertible and Convertible Preferred Stock and Stockholders’ Equity,” it issued nearly $185 million of PLTR stock in SBC , plus another $97.95 million of shares to those who converted their stock options.
Unlike in past quarters, for Q3 the company did not (as far as I can tell) factor its huge stock-based compensation totals into its bottom line. However, adding the roughly $283 million shares of stock issued by the company to its reported net loss of $102 million yields a rather hefty $385 million loss.
I’m not sure if that’s directly comparable to the $853 million loss that the company reported in Q3 of 2020. But even if its loss sharply narrowed last quarter (as I’ve said in the past), it doesn’t make sense for Palantir — which was founded in 2003 and supposedly has great, superior technology — to lose hundreds of millions of dollars every quarter.
Also troublesome is a statement made by CEO Alex Karp on management’s Q3 earnings call. “We continue to expect rapid expansion in our customer base moving forward, as we invest in our sales teams and channel partners and we would expect average revenue per customer to continue to taper as a result of our growing customer count,” he said.
If the company’s technology is so great, why does it have to build up its sales team to such a great extent that it had to discuss the matter on its earnings call? I would think that such wonderful technology would almost sell itself.
And, if Palantir’s products help its customers as much the company and its backers say they do, why is Karp warning about a “taper” — i.e., a downturn — of average revenue per customer?
The Street Spots a Problem
Several analysts pointed out red flags waving around Palantir. For example, RBC Capital’s Rishi Jaluria reported that the growth of the company’s business is decelerating. According to the analyst, sales to governments climbed 34% year-over-year, way down from 66% growth in Q2.
I have repeatedly warned that Palantir could lose U.S. government contracts due to the Republican orientation of its founders. In my last column on PLTR stock, I pointed out that the company had lost a deal with Washington, and I warned that the trend could accelerate.
RBC’s Jaluria identified another issue that I have not previously written about. Specifically, he reported that the increased growth of Palantir’s revenue from the private sector has been powered by sales to SPACs in which Palantir has invested. Jaluria does not believe that this method of generating business is sustainable.
He has less confidence in the company’s growth outlook after its Q3 results were unveiled and believes that the stock is fully valued. The analyst slashed RBC’s price target on the name to $19 from $25 and kept an “underperform” rating on the shares.
Citi was also very bearish on PLTR stock, as it kept an $18 price target and a “sell” rating on the shares. Morgan Stanley warned that Palantir’s ability to keep rapidly growing is uncertain. It kept an “underweight” rating on the name, but lifted its price target to $24 from $22.
Meanwhile, the aforementioned Cathie Wood doesn’t seem worried, buying a total 1.25 million Palantir shares on Nov. 10, according to a company trading update. Those shares have been spread across three of her firm’s exchange-traded funds, ARK Innovation ETF (NYSEARCA:ARKK), ARK Autonomous Technology & Robotics ETF (BATS:ARKQ)
and ARK Next Generation Internet ETF (NYSEARCA:ARKW), according to Business Insider.
The Bottom Line on PLTR Stock
Despite all of Palantir’s issues and challenges, the shares of PLTR stock are still changing hands for more than 22 times analysts’ average 2022 sales estimate for the company.
This all adds up to a solid case for investors to sell the shares. And for risk-tolerant traders, those looking for a way to hedge against a downturn of the tech sector, and individuals seeking an overvalued tech name to bet against, I further believe that PLTR stock is a very good short-selling candidate.
Indeed, given the Street’s recent negativity on the company, the shares are highly unlikely to rally anytime soon, while more missteps by the company and/or a market downturn could easily send them tumbling.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Plug Power. You can reach him on StockTwits at @larryramer.