Recently, shares of Palantir (NYSE:PLTR) sank over 10% following the release of its third-quarter results on Nov. 9. Coming off a low in mid-November last year, PLTR stock hit an all-time-high of $45 in late January. Now, the stock hovers around $22, down about 8% year-to-date (YTD).
A big data group, Palantir is most known for its cooperation with government agencies for counterterrorism, intelligence gathering and military purposes. However, management is now also expanding into broader commercial segments, such as healthcare and manufacturing.
As companies worldwide increasingly adopt digitalization, artificial intelligence (AI) and data management and security are becoming exceedingly critical. According to research, the global big data market will see growth of over $247 billion “at almost 18% CAGR during 2021-2025.” Appen (OTCMKTS:APXYY), an Australia-based data group, also recently highlighted “a significant year-over-year increase in AI budgets, ranging from $500,000 to $5 million per year, up 55% on last year.”
So, clearly investors should pay close attention to growth companies focusing on big data and analytics, such as Palantir. Despite the current bearish sentiment, long-term investors could regard the recent decline in PLTR stock as an opportunity to buy into the share price. Let’s take a closer look.
PLTR Stock and Recent Earnings
Launched in 2003 in part by PayPal (NASDAQ:PYPL) co-founder Peter Thiel, Palantir provides solutions for managing data at massive scales. It has three primary platforms: Palantir Gotham, Palantir Metropolis and Palantir Foundry.
Management recently issued Q3 financial metrics that beat expectations. For the period, revenue grew 36% year-over-year (YOY) to $392 billion. Additionally, adjusted net income came in at $82.1 million, up about 51% compared to the prior-year quarter. Meanwhile, non-GAAP earnings of 4 cents per diluted share remained unchanged YOY. Finally, cash and equivalents ended the quarter at $2.33 billion, while adjusted free cash flow (FCF) was $119 million, implying a 30% margin.
Looking ahead, the company anticipates revenue growth of 40%, reaching $1.53 billion. FCF guidance was also raised from $300 million to in excess of $400 million. COO Shyam Sankar said the following on the earnings call:
“I wanted to highlight three themes. One, we are seeing more traction selling into the defense industrial base as a customer […] Secondly, our work in automotive, and more generally, mobility is growing […] And lastly, our work in healthcare is exploding.”
Still, despite management’s upbeat tone, PLTR stock investors have been concerned about the slowdown in the growth of government contracts. Because of that, they’ve decided to take money off the table.
Growing Commercial Partnerships
So, investors responded negatively to the slowdown in government contracts. However, it’s not all bad news. In fact, in actuality, Palantir’s management has been expanding the commercial side of the business. As a result, U.S. commercial revenue went up by 103% YOY in Q3.
Earlier this year, IBM (NYSE:IBM) and Palantir launched Cloud Pak for Data together, a platform that helps businesses prepare their data for AI applications. Then in September, Palantir committed to an equity investment with real-time geospatial intelligence technology platform BlackSky (NYSE:BKSY). And finally, last month, the company added blockchain data analytics firm Elementus to its Foundry for Builders Program (among others) as well as released a new software for the digital cryptocurrency market.
Management expects this software to contribute to the top line. In fact, during the earnings call, Sankar commented the following:
“We’re going to give [crypto companies] credible AML [anti-money laundering] platforms to enable them to go toe-to-toe and beyond with the legacy players. We’re going to deliver [regulatory] compliance so they can focus on disruption. And of course, they are welcome to pay us in crypto.”
If anything, this all helps make the case to buy PLTR stock.
Adding Palantir to Portfolios
Among 10 analysts polled on CNN Money, PLTR stock has a “hold” rating. Additionally, the consensus is for a 12-month median price target of $24.50, implying a 9% upside potential from the Nov. 17 close.
Right now, the 12-month price range currently stands between $18 and $31. Therefore, if you are not currently an investor in PLTR, you could consider buying into declines — especially if the stock goes toward $21 or lower.
Alternatively, interested readers could consider buying an exchange-traded fund (ETF) that provides exposure to PLTR stock as a holding. Several examples are the ARK Innovation ETF (NYSEARCA:ARKK), the Defiance Next Gen Big Data ETF (NYSEARCA:BIGY), the Renaissance IPO ETF (NYSEARCA:IPO), the ProShares Ultra Technology (NYSEARCA:ROM) and the VanEck Vectors Social Sentiment ETF (NYSEARCA:BUZZ).
Lastly, readers who are experienced in options could also consider selling cash-secured put options. They would be appropriate if you are slightly bullish or neutral on PLTR stock. Selling cash-secured put options generates income through the premium received.
For example, PLTR stock recently traded for around $22.55. A potential trade would be to sell the Jan. 21 2022 expiry $22 puts. And the current option premium is $1.55. Therefore, the maximum return for the seller on the day of expiry would be $155, excluding trading commissions and costs.
If the put seller gets assigned the option, the maximum risk is similar to that of stock ownership but partially offset by the premium received.
The Bottom Line on PLTR Stock
Currently, the shares of PLTR stock trade at 29.27 times trailing sales and 19.92 times book value. What’s more, the forward price-to-earnings (P/E) ratio currently stands at 149.45 times, according to Seeking Alpha. Although these metrics imply a rich valuation, they are not uncommon for a stock in the fast-growing cybersecurity sector.
For comparison, here are how some trailing price-to-sales (P/S) ratios for several other software and cybersecurity names fare. Right now, Cloudflare (NYSE:NET) stands at 110.81 times, Crowdstrike (NASDAQ:CRWD) stands at 52.85 times, Datadog (NASDAQ:DDOG) at 66.39 times and Snowflake (NYSE:SNOW) at 121.81 times.
As a high-growth company, shares of Palantir are volatile. Plus, if Wall Street gets even more concerned about revenue levels in the coming months, the negative sentiment could likely continue. Still, any further drop in PLTR stock should be seen as an opportunity to buy it for the long run.
On the date of publication, Tezcan Gecgil 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.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.