To The Moon

It seems like Palantir Technologies (NYSE:PLTR$Palantir Technologies Inc.(PLTR)$ ) is once again surrounded by bearish narratives. Although the company topped the Street's revenue and EPS estimates in its Q4 report, its shares have plummeted almost 20% since then over concerns relating to itsgrowth momentum, profitability outlook and its rich valuations. In this article, I'll attempt to discuss these points in detail, to eventually explain why the worst is over for Palantir stock and its shareholders. Let's take a closer look to gain a better understanding of it all.

Turn to Profitability

Let me start by saying that Palantir was founded over 19 years ago, but it has remained unprofitable ever since, due to reasons spanning from diseconomies of its small scale, elevated stock-based compensation expenses, and impetuous investments in other special purposes acquisition vehicles (or SPACs). But the tide seems to be turning finally. I've explained inmy prior articles why Palantir's stock-based compensation is no longer going to be an overhang on the company's profitability and that its losses to marketable securities will be limited, but readers deep in the red were understandably skeptical about the whole turnaround narrative.

This time around, though, Palantir's management itself acknowledged that they're addressing these issues. For starters, in their latest 10K filing, they made a very important remark that has gone unnoticed by the investment community. It reads:

…we do not currently anticipate entering into new Investment Agreements to purchase, or commit to purchase, securities of special purpose acquisition companies.

This is a big statement. I say this because SPACs have performed poorly and Palantir has borne the brunt when the value of its investments resulted in massive losses to its investment portfolio. The company lumped these losses to its marketable securities together in "other income (expense)" item on its income statement. As the value of these investments continued to decline with the recent market-wide correction, Palantir's profitability was adversely hit.

(Read -Palantir: Peak Absurdity)

Fast-forward to now, and Palantir's management is acknowledging their change of stance to "No More SPACs". This suggests the worst is over and the company's bottom line won't be hammered by poor and questionable investments in a myriad of SPAC startups. In essence, the company's bottom line finally gets some breathing room to become profitable.

Secondly, Palantir's excessive stock-based compensation has been a major point of contention amongst investors. The company lumps these non-cash expenses into operating expenses, which are further classified under sales and marketing, research and development or general and administrative expenses. Again, I discussed in a prior article how these stock-based compensation expenses were dragging Palantir's profitability lower and explained why it'll stop being a cause of concern in 2023. Fast-forward Palantir's Q4 FY22 and Palantir's stock compensation expenses fell once again, this time by $38 million. Its management hinted that SBC won't be a matter of concern in 2023.

(Read -Palantir: Smashing the SBC Myths)

Lastly, Palantir is also cutting its workforce by 2% as part of its cost-cutting measures, like almost all the other software companies. These initiatives, collectively, have allowed the company to post its first profitable quarter in Q4 and its management is expecting FY23 to be their first profitable year. This is a commendable feat considering that up until a few months ago, the company was expected to post its first profitable year in FY25. This pull forward goes to show the business has scaled well and that its top brass is steering the company in the right direction.

Growth Conundrum

Another point that investors are concerned about, is a slowdown in Palantir's growth momentum. Specifically speaking, how the company's Q4 results simply weren't good enough.

BusinessQuant.com

But here's the thing - I had published an earnings preview article on Palantir a few days before its Q4 results were announced. The company blew past my estimates in both its segments.

(Read -Palantir: Testing Times Ahead)

For instance, I had estimated its government revenue to grow 2% sequentially, but the figure actually grew 7.1%. Similarly, I had estimated its commercial revenue to decline 0.5% sequentially, but it grew 5.6% instead. So, I have no complaints with the company's growth momentum and contend that its pace of revenue growth will pick up once we're out of the recessionary environment in a few months' time.

Valuation Talk

Lastly, let's talk about Palantir's valuations. The stock is trading at around 9 times its trailing twelve-month sales, which is considered very high on a standalone basis. However, note in the chart below how its Price-to-Sales multiple is at its lowest level in 2 years. This suggests the stock is valued attractively at its current levels, contrary to what the bears may lead us to believe.

BusinessQuant.com

Secondly, granted that a broad swath of software infrastructure stocks has corrected in price over the recent months, ever since the bull rally fizzled away. But the extent of their P/S multiples correction hasn't been this drastic throughout this industry.

Note in the chart above how some of the other popular stocks that are also classified in the software infrastructure industry, like Palantir, have seen a moderate correction in their P/S multiples. On the other hand, Palantir's P/S multiple has plummeted from over 35 times merely a few months ago, to just 9 times now. This suggests that Palantir's shares have been punished more severely than its peers, and also that many of its risk factors have already been priced in at current levels.

Final Thoughts

Granted that Palantir hasn't done well on the profitability front, and it's understandable why investors have been frustrated with its management's decisions so far. But the company seems to be finally turning a corner and is en route to registering its first profitable year. This is a commendable feat considering that we're in a recessionary environment and companies across the globe are posting deteriorating results. The stock is trading at a relatively low Price-to-Sales multiple, which makes for an attractive buy at the current levels. So, investors with a multi-year time horizon may want to consider accumulating Palantir's shares on potential price corrections.

Source: seeking alpha