Slowing Growth Could Cause Further Slide for Palantir Stock

A longtime “permabear” on Palantir Technologies (NYSE:PLTR), I won’t try to say I called the recent big drop in PLTR stock ahead of time. While correct in my Nov. 3 prediction that it stood to move to lower prices, I’ve called it wrong plenty of times with shares in this data analytics software company.

The Palantir (PLTR) logo on a grey wall.
Source: Michael Vi / Shutterstock.com

But while the stock has found a way to recover after a big selloff many times in 2021, that may not be the case in 2022. Instead of continuing on with a roller coaster pattern, it may make a continued move below $20 per share.

How? In past coverage, I’ve talked a lot about how Federal Reserve policy changes (i.e. rate hikes) could sink it lower. Yet even if you assume that a rise in rates next year won’t spell big drops for growth stocks, there is something else that could lead to more downward pressure for Palantir’s shares: if the underlying “story” with it changes. If more comes out to indicate that recent fears of slowing revenue growth are right on the money.

With this, you may want to think twice before “buying the dip.”

PLTR Stock and its Trip Back to $20 Per Share

When I last wrote about, Palantir appears to be making a return to $30 per share. The shrugging off inflation/interest rate worries at the time played a role in this, as did bullishness with the company’s Q3 earnings results.

Of course, a comeback in the PLTR stock price did not play out. Sure, the company reported solid numbers for the quarter ending Sep 30, 2021. Revenue of $392 million came in above sell-side estimates of $385 millions. Earnings per share (EPS) of 4 cents was in-line with projections. However, there was a bit of disappointment. Revenue for its flagship governmental business came in below expectations. This has sparked fears that growth for the company overall will start to slow down. Said concern was further heightened by a bearish call from RBC Capital analyst Rishi Jaluria.

Cutting his rating to the equivalent of “sell,” and lowering his price target from $25 per share to $19 per share, Jaluria cited the slowing government revenue growth, plus concerns with the company’s commercial revenue growth, as the main reasons behind the downgrade. In particular, the company’s latest strategy of making investments in special purpose acquisition companies (SPACs), which in turn have the operating businesses they merge with purchase services from Palantir. The sell side analyst sees this as “unsustainable.”

This combo of a poorly received earnings release, plus the downgrade, pushed the stock from around $26.75 per share, to the low $20s per share. Then, with the post-Thanksgiving Omicron/Fed selloff, shares fell back below $20 per share for the first time since May. As of this writing, it’s attempting to get back above $20 per share. But while prior sell-offs have been quickly followed up with strong rebounds, this may not happen this go-around.

Palantir and The Big Risk of Decelerating Growth

In prior articles, I’ve focused a lot on the valuation issues with PLTR stock. Sporting a triple-digit price-to-earnings, or P/E, ratio, it was vulnerable to big price declines. That is, if factors like rising interest rates could result in severe multiple compression for growth stocks.

However, I’ll admit that rate hikes may not necessarily result in a massive correction for growth stocks. Even if rates move higher, they’ll still be at historic lows. The rich multiples sported by growth stocks today could hold. Then again, in Palantir’s case, a rich valuation will hold only if the “story” behind it stays as-is.

Unfortunately, like I hinted at above, the “story” may be on the verge of changing. Q3 results are just the latest indication that governmental revenue growth is slowing down. Back in October, I discussed how two analysts (Citi’s Tyler Radke and William Blair’s Kamil Mielczarek) both noted the company’s light governmental deal activity in recent months.

Yes, this may not be an issue, if Jaluria’s concerns about unsustainable commercial growth prove to be overblown. But if the analyst is right, and its unsustainable things like its SPAC gambit that are jolting up commercial revenues? Growth in this segment could see a considerable slowdown. In turn, if this results in Palantir’s growth falling below its 30% per year benchmark? A severe re-assessment of its valuation will likely occur.

The Verdict on This Data Analytics Stock

At around $20 per share today, some may say it’s time to “buy the dip” with Palantir. Yet with high growth already baked-into its valuation, upside may be limited. If things work out, the stock may at best bounce between the $20 to $30 per share trading range it’s been stuck in since June.

Comparing its limited downside, to what could be big downside risk, if revenue growth really starts to slow down, you may want to take a pass on PLTR stock.

On the date of publication, Thomas Niel 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.

Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.


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