Just as it looked as though Palantir Technologies (NYSE:PLTR) would rally again, its quarterly earnings rained on its parade. PLTR stock lost 12% on the week, breaking down below the critical 20-, 50-, and 200-day moving average at around $25.
What did investors not like about Palantir’s third-quarter results?
PLTR Stock Slumps After Q3/2021 Report
In the quarter, Palantir added 34 new customers and closed 54 deals worth $1 million or more. 18 of those deals were valued at $10 million or more. In total, Palantir grew revenue by 36% year-over-year to $392 million. At an annualized $1.57 billion and a $45.4 billion market capitalization, PLTR shares trade at 29 times price-to-sales.
Value investors could buy Microsoft (NASDAQ:MSFT) at 14 times sales or Oracle (NYSE:ORCL) at 6.8 times. Still, that valuation comparison is not fair. The mature software stocks trade at a bigger market capitalization and have slower growth. Palantir expects revenue will grow by 40% to $1.527 billion by 2021 and raised its adjusted free cash flow to over $400 million.
Three Themes to Growth
Strong deal value, growing 50% to $3.6 billion, signals strong business ahead. Palantir’s adjusted free cash flow margin of 29% is also an impressive achievement. Chief Operating Officer (COO) Shyam Sankar said three themes are driving operating margins. First, it is seeing more traction with the defense industrial customer. Second, mobility is growing in the automotive sector. Third, its growth in healthcare is rising.
Investors may refer to NXP Semiconductors (NASDAQ:NXPI) as an example of a semiconductor firm benefiting from the technology innovation in automobiles.
Palantir has customers in the mobility space that includes original equipment manufacturers (OEM), their suppliers, EV charging companies, and insurers. For example, Palantir is helping the National Health Service (NHS) analyze information for millions of patients. COO Sankar said, “We have a very unique opportunity and a diverse footprint that we believe continues to uniquely position us deliver on the necessary transformation in healthcare delivery from operational excellence to complex clinical care.”
Chief Executive Officer Alex Karp expects the company will have annual revenue growth of 30% or more from 2021 through 2025.
Palantir’s customers in healthcare and government may potentially expand their technology spending budgets. Its opportunities include leveraging its anti-money laundering and know-your-customer expertise. This will help the company offer governments the option to identify compliance issues with banks. In turn, banks will respond by strengthening their compliance programs.
Palantir can implement solutions quickly. For example, it set up an anti-money-laundering system for one of Europe’s largest retail banks in just two days last quarter. Banks may justify the return on investment (ROI) based only on the speed of the installation. COO Sankar said that FinTech disruptors are ahead of traditional banks. In the Q3 2021 earnings conference call on Nov.9, he said, “legacy compliance solutions are often 2 or more decades behind. We believe there are no alternatives that can compete on cost, speed, and performance.”
Palantir has a strong moat that gives customers an edge. Expect the company to win more customers in the coming year. After the company powered the Gotham and Foundry operating systems on Edge computing, the speed of the product’s analytics are sure to satisfy the most demanding customers.
Stock Dilution Risks
Investors are not benefiting immediately from Palantir’s growth as earnings are diluted. Insider sales are hurting shareholders. Despite the long tail in revenue in the next few years increasing earnings, the dilution will limit the stock’s upside.
PLTR stock already tripled since its initial public offering. As long as management grows the company faster than it dilutes shareholders, the stock will outperform the index. For now, investors should assume the stock is stuck in a $22 – $27 trading range because earnings per share are not expanding.
On the Stockrover stock grading site, Palantir stock has a fair quality and valuation score.
Palantir scores a 41/100 on quality. This is on the low side because of the weak return on invested capital. Gross margins are stronger than the S&P 500 average. As costs fall and revenues rise, its quality score will improve.
The value score is 42/100. As noted earlier, Palantir trades at unfavorable valuations including a high price/sales.
The average price target, based on analysts, is $22.60. This suggests the stock has no near-term upside.
Your Takeaway on PLTR Stock
Palantir is a technology investment that requires a holding period of at least three years. Thankfully for them, government contracts last many years. Upon renewal, the amount may increase. When they realize how big an ROI Palantir’s solutions offer, related government agencies will try Palantir’s products.
Now that shares are down slightly, Palantir is a stock to consider again.
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.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.