For a few important reasons, most institutional and retail investors are unlikely to become bullish about Palantir (NYSE:PLTR) stock in the wake of the outbreak of the Russian-Ukrainian conflict.
Factoring in the company’s huge stock-based compensation, Palantir it remains unprofitable, while its margins are expected to sink and the valuation of PLTR stock remains very high.
Conflict Lifted Confidence of PLTR Stock Bulls
In recent weeks, a number of pundits who are bullish on PLTR stock cited the Russian-Ukrainian conflict as a key reason for their optimism about Palantir.
For example, in a column published on March 11, Seeking Alpha contributor Steven Fiorillo wrote that the conflict should help PLTR this year.” According to Fiorillo, the company “has transformed from a black box company whose software was utilized to hunt down terrorists and facilitate special operations missions to a full enterprise software company that empowers organizations to make critical operational decisions.”
And noting that Palantir CEO Alex Karp has lately spent a significant amount of time in Germany, which recently decided to greatly boost its defense spending, Fiorillo suggests that the company is going to sign many contracts with the German government.
The Conflict Probably Won’t Help For Now
Palantir will probably make some deals with Berlin. But for a few reasons, I don’t expect these contracts to boost PLTR stock significantly, at least for the next year or so. And I’d be surprised if Palantir’s shares rise much above the $20 level in the next few years.
One reason for my pessimism is that several developments have probably shattered most investors’ faith in Palantir and PLTR stock.
The biggest factor undermining confidence in Palantir now is that, in line with my previous predictions, its supposed biggest strength is eroding. Specifically, its government business is slowing.
Citing the steady deceleration of the growth of Palantir’s government business, Fiorillo in a February column acknowledged that “the growth story on the government side seems to have deflated.” Meanwhile, as I’ve pointed out in previous articles, the company has lost some fairly huge government deals.
In the U.S., there have been reports that Palantir could lose its “lucrative contract” with U.S. Immigration and Customs Enforcement (ICE). The U.K.’s Department of Health and Social Care cut Palantir loose in favor of an alternative before hostilities broke out in Ukraine, contributing to a sharp deceleration of the company’s government business.
As a result, investors have no way of knowing if any deals that it manages to make in Germany will offset the drags on the growth of its government business. And given the relative size of U.S. defense spending versus German (and even European Union) defense spending, I wouldn’t bet on EU deals surpassing Palantir’s deceleration in Washington. And I don’t expect many others to make that wager either.
The second factor likely to weigh on investors’ confidence towards Palantir is that the funds managed by Cathie Wood, who for over a year was by far the most visible cheerleader for the company, have sold all of their PLTR stock. When a stock’s most famous bull throws in the towel on it, most investors are not going to want to own the shares for a long time.
Eroding Margins and a Still-High Valuation
Including its lofty stock-based compensation, Palantir remained unprofitable last quarter, generating a per share loss of 8 cents. Meanwhile, its operating margins are headed in the wrong direction. For Q1, the company expects adjusted operating margin of 23%, which would be a drop from 29% in the fourth quarter, according to Barron’s. For the full year, the company is expecting operating margin of 27%, which would be down from 31% in 2021.
On the valuation front, even though the shares have tumbled 58% over the last year, their price-sales ratio is still 22.7, according to Marketwatch.
The Bottom Line on PLTR Stock
Investors’ confidence in Palantir has been severely eroded and is unlikely to recover for the foreseeable future. Moreover, the unprofitable company’s margins are poised to decline, and its valuation remains very high.
In light of these points, I continue to urge investors to sell PLTR stock.
On the date of publication, Larry Ramer 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.
