Palantir Stock Looks Intriguing Despite Valuation Concerns

  • Stock Market Analysis
  • PLTR stock has moved sideways since going public in late 2020
  • The company’s financial performance, however, has been solid, answering two key questions surrounding the business
  • Valuation remains a concern, but there’s a case for paying up here

Palantir Technologies (NYSE: PLTR ) is a controversial company; it’s always going to be.

Its role in global warfare and domestic programs in the U.S. and Europe upsets many people. On occasion, even Palantir’s own employees have questioned their company’s contracts.

But when Palantir went public via a direct listing in 2020, analysts labeled it a controversial stock, for reasons that go far beyond politics. Skeptics pointed to two critical issues with the company’s business model.

The first was whether Palantir was, as it claims, a software company. Obviously, Palantir does develop software. Still, the customized nature of its solutions and the number of engineers required to install them has long led to claims that Palantir is more of a consulting company than a software firm. One ardent bull even addressed those concerns in April.

The second was Palantir’s reliance on the U.S. government for a good chunk of its revenue. Even disregarding the political nature of those contracts, government revenue typically doesn’t grow all that fast.

Even the company's management tacitly admitted this concern was valid. However, since going public, and even before, Palantir has focused on growing its presence in the commercial market.

Valuation still is a question mark, and last week’s earnings report looked disappointing. But growth investors should be taking a long look at PLTR here. The stock is now down two-thirds from its 52-week high.

Palantir Answers The Critics

In 2019, according to figures from Palantir’s Form S-1, Palantir’s gross margins were just 67%, down from 72% the year before. Repriced stock options were a factor, but the company also called out higher employee expenses.

Ostensibly, those expenses came from the engineers required to deliver Palantir’s custom-built solutions—which, again, is the mark of a consulting firm, not a traditional SaaS (software-as-a-service) provider.

The 67% print, meanwhile, was far lower than the 80%-plus figure generated by many larger software companies. That raised concerns that Palantir wouldn’t reach the same operating margins, leading investors to pay 20x revenue (or more) for faster-growing software plays.

However, as Palantir’s software products have accelerated their growth, gross margins have responded in kind. The figure was 78% in 2021 and closer to 79% in the first half of this year.

In terms of government reliance, there too results have improved. Commercial revenue more than doubled in 2021 and has done the same through the first half of this year.

Yet, PLTR stock hasn’t provided long-term gains. The stock opened for trading in 2020 at $10 per share and is currently trading at $9.43.PLTR Weekly Chart

But, to be fair, that alone doesn’t make the stock a buy.

The Case For PLTR Stock

Based on 2022 guidance, Palantir still trades at more than 8x revenue. The company is guiding for an adjusted operating profit, but that figure excludes a huge amount of stock-based compensation. That expense has totaled $295 million already this year, a figure nearly equal to the full-year outlook for operating profit ($341 million to $343 million). In the first half, stock comp was more than 30% of revenue.

On the second quarter conference call, chief executive officer Alex Karp predicted the company wouldn’t be profitable until 2025. From that point, the company should have room for growth, but this still has an enterprise value of roughly $16 billion.

Still, this might be a company worth paying up for. The new software platforms are clearly hitting. Karp spoke passionately on the Q2 call, making a persuasive argument for his company and (indirectly) its stock. Karp argued that threats were rising globally, making Palantir’s products ever more valuable—and that those products had left competitors in the dust.

The CEO emphasized that point in an unusual way, admitting that Palantir this year had brought on “a number of customers…that, quite frankly, didn’t like us,” including the U.S. government.

That’s not something you’ll hear from just about any other CEO. But, to Karp and PLTR bulls, that’s precisely the point. PLTR isn’t just any other company, meaning it shouldn’t be valued as such. And at least as far as the business goes, Karp and the bulls have been right so far.

Disclosure: As of this writing, Vince Martin has no positions in any securities mentioned.

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