Is Palantir stock built on the hype?
OWe will remember 2021 for many things, such as the continuation of COVID-19, 7% inflation, and markets that hit all-time highs. It was also the year of the same stock, in which companies like GameStop (NYSE: GME) and AMC Entertainment Holdings (NYSE: AMC) skyrocketed while being pushed by message boards like Reddit’s WallStreetBets.
Palantir Technologies (NYSE: PLTR) also regularly appears among the 10 most popular stocks on WallStreetBets. But despite its popularity, it has underperformed the market in 2021. Is this a sign of what lies ahead?
Palantir is a software data management company. More specifically, the company creates data integration, management and security platforms for its customers. Using the platform, the client is able to respond quickly to complex queries using huge amounts of data. Palantir offers its customers three main products; Gotham, Foundry and Apollo.
Gotham is an artificial intelligence (AI) ready operating system. This system enables faster decision-making by analyzing complex data to gain insights. It has been used for disaster relief and by defense agencies and is also commercially available. Foundry is described by Palantir as the “modern enterprise operating system”. It is an integrated platform that provides analysis, modeling, visualization and other functions. The Apollo product is the delivery system that powers Palantir’s software platforms. It also allows customers to operate outside of the public cloud, which is often necessary for military organizations. Palantir serves the public and private sectors.
Palantir stock hit highs of $45 in early 2021 after debuting a few months earlier at just $10. It was at the height of short cuts fueled by individual investors and message boards. The stock quickly pulled back from those highs and the stock price has underperformed ever since. However, there are reasons for optimism as well as reasons to continue to worry.
Prolific revenue growth
Palantir has had no problem increasing its revenue recently. In the third quarter of 2021, the company recorded revenue of $392 million. This figure is 36% higher than the $289 million recorded in the prior year quarter. It also expanded its customer base, with business customers growing 46% quarter over quarter. The company has also won big customers with deep pockets. In the third quarter, it announced agreements with the US Air Force, the National Institutes of Health and the US Department of Health and Human Services. In total, the company reported 54 transactions worth more than $1 million.
Palantir also has excellent gross margin and adjusted operating margin. For the third quarter, gross margin under generally accepted accounting principles (GAAP) was an impressive 78%. This is a great sign that the company could successfully move towards net GAAP earnings.
Palantir also reported adjusted operating profit of $349 million. On the one hand, it is very impressive because it represents a margin of 32%. On the other hand, it highlights an issue that should give shareholders pause: the stock-based compensation (SBC) charge.
As mentioned, Palantir reports a non-GAAP operating margin which is very impressive but continues to post GAAP operating losses. In effect, the company removes SBC from the GAAP figures to arrive at the adjusted figures. Palantir uses SBCs extensively to reward executives and other employees. For the nine months ended September 30, 2021, the company spent over $611 million on SBCs.
This usually results in an increase in the number of shares and dilutes existing investors. However, this is not entirely negative. SBC can also preserve cash at a time when the company is spending a lot to grow its business. Thanks to the SBC, Palantir was able to post positive operating cash flow through the third quarter of 2021.
It also helps attract and retain top talent. It’s no secret that the labor market is very tight. Attracting the best people can make all the difference in the success of a business. Finally, when insiders own shares in the company, their interests are aligned with those of the shareholders.
The valuation seems more attractive
Growth stocks have been hit hard so far in 2022. Inflation has topped 7% and the Federal Reserve is expected to hike rates, likely multiple times this year. This particularly hurts growth stocks, since Wall Street values them on future cash flows.
There also seems to be a general concern that valuations have overshot fundamentals a bit in 2021. This revaluation has made Palantir much more attractive lately, especially against some other fast-growing tech stocks, as noted. below.
The bottom line
Palantir remains one of the most popular stocks with individual investors, even after its underperformance in 2021 and so far in 2022. But it’s not a stock built on hype alone. In fact, there’s a lot to like about the recent results. Revenues continue to grow and margins have increased well. The company is now generating positive cash from its operations, with a nice helping hand from its SBC program. The valuation has fallen significantly, which makes Palantir more attractive than many other growth names. Even so, the tech stock slump may not be over yet, and investors should be cautious here.
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Bradley Guichard owns Cloudflare, Inc., CrowdStrike Holdings, Inc. and The Trade Desk. The Motley Fool owns and endorses Cloudflare, Inc., CrowdStrike Holdings, Inc., Palantir Technologies Inc., and The Trade Desk. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.