Summary
PLTR stock, in our opinion, has put in a bottom.
Revenues continue to expand, while Palantir is pushing toward real sustained profitability.
The international strife in Ukraine may lead to a boost in government adoption of Palantir's solutions and so it serves as a catalyst.
No debt and free cash flow positive.
naphtalina/iStock via Getty Images
We think the bottom is in for Palantir Technologies (NYSE:PLTR) stock. Period. End of article. In all seriousness this was something we had said in late February when Palantir stockall but reset back to trade just about at its direct public offering price. The thing is that technology stocks, especially those that are potential game-changing names, are often extremely expensive in the early stages. You really cannot value them on an earnings basis because there are no earnings to be had. What one has to do is determine if what the company offers will solve enough headaches for customers that eventually the growing sales turn into profits. For years many of these stocks will lose money. But they lose money as they spend to attract customers. They invest heavily in their growth while seeing revenues increase dramatically. Palantir is seeing revenues grow tremendously.
Sometimes that growth fades and the company never really transforms the world like it set out to do. It is not uncommon that these stocks wither away to sub $1 then eventually delist to the OTC markets before going out of business. Happens a lot. Some argue this could happen to many of the innovation type companies. We admit, there are a number of companies that seem revolutionary at the time and then go bust years later. EvenCathie Wood abandoned Palantir just days after we thought the reset was complete and turned bullish. For those keeping score, the stock is up about 20% since that time. We digress.
But we see the bottom as in. Internal metrics improve year-after-year for Palantir and we see no reason why the ongoing growth will not eventually lead to real profits. Great companies always seem to start out losing money. Even after this rally, we remain bullish long-term. In the short-term, we have reason to be bullish based on the problems they solve and thehorrible situation in Ukraine and the need to mine data for intelligence. We think so, for the long-term investor. We like a buy in this stock on any weakness. Sure, the stock is still expensive, even for high growth tech, but is much more reasonable compared to a few months ago. Keep in mind that the company is breaking even and making some money some quarters. When thecompany reported earnings, we saw that the growth remains on track. You can buy here.
Our trade recommendation for PLTR stock remains valid
Our last trade recommendation is still a set of entries we would follow
Target entry 1: $11.95-$12.15 40% of position
Target entry 2: $10.80-$11.00 60% of position
Stop loss: $9
Target exit: $13 real short-term, $15 medium-term
Options recommendations: Consider the April $12 puts for $0.45-$0.65 in premium. Call option buying is not nearly as pricey as a few weeks ago but you can consider the August $14 strike calls for $1-$1.50.
Palantir - Both the government and commercial sectors are doing well
In the recent quarter, performance was strong andahead of consensus estimates. Total revenue grew 34% year-over-year to $433 million, beating estimates by almost $15 million.
Recall that there are two reporting segments for Palantir: the government and commercial segments. The commercial revenue stream has grown at a rapid rate over the last year, while government results are likely to get a big boost following international strife. While the war in Ukraine is an unexpected catalyst, the company has invested in itself to grow sales. To improve sales, Palantir has gone on a hiring spree. It expanded its sales team and they have been working to secure new orders. While the Government revenues have slowed their growth somewhat, they still rose 26% from last year, and the company added a total of 34 net new customers in the quarter. The commercial revenue is expanding rapidly increasing 132% in 2021, and up 47% in Q4 vs. last year.
Palantir is seeing very positive momentum in its margins. Positive movement in margins is important in a software company as it really highlights strengths, or weaknesses, in the way it distributes its products. What we mean is that if Palantir needs other companies to help move its products then gross margin would be tracking maybe 30-50%. When you have software companies with gross margins that are well over 50%, and approaching 60-70%, then it tends to mean the company is doing the heavy lifting itself. Palantir is delivering because gross margins expanded to 78% in the last year which is up double-digits from the prior year's quarters.
Palantir is scratching the surface of profitability
Even after the pull back in putting in a bottom in our opinion, the stock is expensive, like so many other growth tech names. The company lost $59 million in the quarter, but adjusted income from operations was $124 million. At the same time, and this is a big positive, the company is free cash flow positive. Adjusted free cash flow was $424 million for the year. That said, the company was profitable at a $0.02 adjusted EPS bottom line figure.
When itcomes to valuation, you can look at the price to sales but it is still very high. At 16X sales, the stock is still expensive, factoring in the drop in shares to $12. Of course, this valuation is so much more down to Earth compared to when the stock exploded when it was 3X as high as it is now. The PEG ratio is respectable and we like the cash flow as we mentioned.
While the company is growing tremendously, the stock is still not without risk. The company could see government slash spending in tough times (like arecession which some say could come next year), though, some would argue that their technology saves the government money. Palantir brings software, artificial intelligence, and data into a solution to help government make decisions to centrally track things while identifying patterns and creating frameworks to assess impact of certain decisions. The Ukraine crisis may push faster adoption of the tech. On top of that, we see the commercials sales growing though a recession could lead to reduced spend on technology investments.
One risk we always hear about is the unrelenting stock based-compensation. We addressed that issue in this piece, but will reiterate that we like that management has acknowledge that it is a problem.
Take home
Look, the last month has seen some volatile action, but PLTR put in a bottom. If markets absolutely tank in a few months due to escalating war, really rapid rate hikes, or poor economic news, shares could fall back to lows, but we think the sentiment and momentum is on the bulls' side. Even with a rebound, shares have been crushed still. We see a regression to the mean as likely, which would be the mid-teens for this stock. The company operates with no debt and has nice positive free cash flow. With the growth the company is displaying, and with it clawing at profitability with some positive catalysts putting wind in the sails, we remain bullish.$Palantir Technologies Inc.(PLTR)$ $Palantir Technologies Inc.(PLTR)$
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