Palantir Technologies Inc. $Palantir Technologies Inc.(PLTR)$ was named by its co-founder Peter Thiel after J. R. R. Tolkien’s “Lord of the Rings” all–seeing stones palantíri. Prior to it reporting earnings on May 9, let’s gaze into the crystal ball to see what happened in recent past, and what the future might bring.
Peter Thiel’s (also of Paypal and 1st external Facebook investor fame) superimposed on wizard Saruman with all-seeing crystal ball palantír in Tolkien’s fantasy novels –inspiration for his data analytics software co. of same name. Pic credit: bizjournals
The Q1 2022 consensus EPS estimate is $0.04 (no change year-on-year y.o.y) and revenue estimate is $444 mil (+30% y.o.y). Consensus forward guidance for Q2 2022, is expected to be $484 mil.
Investors would be looking for a big enough EPS, revenue and forward guidance beat, to rejuvenate its share price (but more on this later).
Palantir’s Crystal Balls
Palantir operates two main software platforms: Gotham, which serves government clients since 2008; and Foundry, targeting large enterprises and private companies starting 2016. A third platform Apollo, provides monitoring and automatic software updates for both platforms as a cloud-based service from 2020.
Palantir software platforms source: Palantir co. blog
Palantir's platforms aggregate data from disparate sources, analyses the data using artificial intelligence algorithms to derive insights for making informed decisions, akin to its namesake –crystal ball you gaze into for answers.. The U.S. Army for example, uses Gotham to collect intel from various government agencies and local sources on the ground to better plan combat missions. Large enterprises can also use Palantir’s capabilities to pull together diverse internal and external data to analyse, and find e.g. ways to streamline their operations.
Running with the Bulls
The bulls ‘love’ Palantir for the following reasons:
- Close ties with the U.S. government and agencies ranging from Defence, Veterans, Energy, Food and Drug Administration to Centre for Disease Control and Prevention. It has built years of trust with robustness, data security compliance and governance for such critical deployment, and represents economic moat that other competitors find hard to penetrate. Its sales however are only expected to grow marginally by 2%, quarter on quarter, with estimated revenue of $242 million in Q1 2022.
- Growing commercial revenue, accounting for 45% of its sales. It has ramped up to 260 customers in this sector, up 74% y.o.y., but revenue is estimated to be just $202 million, or up 4% in Q1 2022.
- Russia’s invasion of Ukraine is actually positive for the company as more government agencies not only in US but also UK and EU look to upgrade their data analytics systems securely to counter threats of cyberattacks and military aggression across Europe.
- Adjusted gross margin rose from 71% in 2019 to 81% in 2020, further to 82% in 2021. It showed there is plenty of pricing power in the data mining and analytics market that Palantir can tap on, as governments and organisations race to enhance their capabilities and toughen security.
Mauled by Bears
The bears ‘hate’ Palantir for the following reasons:
- Reliance on government ties could also be its Achilles heel, as its contracts might not be renewed with change of administrations in the US and elsewhere, or if its capabilities are used for politically controversial and divisive purposes. Case in point was the usage of Gotham in aiding the Immigration and Customs Enforcement's (ICE) to deport undocumented immigrants during Trump’s administration, which sparked internal protests and resignations across ICE. In such cases, its economic moat might just evaporate.
- It is still unprofitable, although it has narrowed its net loss substantially from $1.17 billion in 2020 to $0.52 billion in 2021.In fact, throughout its 19 years history, it has never been profitable. Analysts estimate at its current revenue and other metrics trajectory, it might take another two years for it to be profitable.
- Higher interest rate environment we are in moving forward might cause investors to exit this and other tech software growth stocks, and move to more defensive or value stocks.
- Stock dilution that chews up current shareholders stakes. As it is unprofitable, it liberally offered stock-based compensation (SBC) to attract top talents to join, to developed its platforms and capabilities to stay ahead of competition. For example, by end 2021, its outstanding share were 1.924 billion, a whopping 96.42% increase from 2020.
- High valuation relatively at 67.71 at May 6 closing price, meaning one is investing close to $68 for every $1 earnings. This has come down substantially after its share price ‘crashed’. Some of its competitors, e.g. Tyler Technologies is at 64.41 and Verint Systems is at 38.68.
Bulls and Bears Reading on the Charts
From Daily chart, we can see price is almost at all time low since IPO of $8.90 (blue line at bottom) at close of $9.48 on May 6. Drawing Fibonacci retracement levels from recent Sep 2021 high to lowest level in May 2022, and together with other indicators might offer clues on next price movements.
Daily Chart PLTR
If earnings beat and positive outlook, the upside for this stock could be double digit, consistent with movements around earnings in previous quarters. First target is to 20 MA at $12.12 (+22.47%) and over longer term with strong momentum to $14.16 (+49.37%) towards the 0.236 Fib level, which is also the range where price has oscillated between Jan to May 2022.
If earnings missed and negative outlook, coupled with general weakness of broader markets in past 5 weeks that look set to continue, price could tumble lower to all time low $8.90 (-6.12%) and likely further to $8 (-15.6%) before finding support and next catalyst to rebound.
As I don’t have any position currently in $Palantir Technologies Inc.(PLTR)$, I would likely gaze at the price action from afar and only enter long if there is strong price momentum upwards and confirmation of trend reversal (e.g. above 0.382 Fibs). Shorts play might be limited in returns vs risks as the price has fallen very far towards single digit price level.
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