Palantir (PLTR, Financial) has been one of the most buzzing tech stocks ever since its listing in October 2020. The data mining specialist in known to empowers state organizations and businesses to collect and analyze data from different sources. Its software solutions help the management of these organizations to gather a better understanding of their processes and help them to enhance the efficiency of the organization as a whole.
The company operates two platforms – Gotham and Foundry. The Gotham infrastructure primarily supports U.S. governmental agencies whereas the Foundry platform offers private enterprises and organizations similar capabilities with respect to data mining. In 2020, governmental clients accounted for around 56% of Palantir's income, while business customers accounted for the remaining 44%.
The company has more than doubled in value since its listing, and the biggest question in the minds of investors is whether the stock has any upside potential left. Let's take a look.
Recent financial performance
Palantir has reported three back-to-back all-around beats since its listing on the Nasdaq last year. For the most recent quarter ended March 31, the company reported a top-line of $341.23 million that was $8.93 million above Wall Street expectations, with increased government revenues from its data-driven solutions. Its earnings per share were around 4 cents and were marginally above the analyst consensus estimates.
The company has had an interesting set of developments, including a two-year extension of its partnership with Grupo Global, Latin America's largest media company, with respect to the provision of its Foundry software. The company has worked with Airbus (XPAR:AIR, Financial) to develop a strong data-sharing solution called Skywise, catering to the aviation sector. Its regular announcements with respect to tie-ups with large corporations and government agencies ensure that there is a positive sentiment around the stock.
The upcoming Space Force partnership
Palantir has recently disclosed a new $32.5 million deal to provide cloud-based internet services to the United States Space Force and Air Force. The new agreement will strengthen the company's current relationships with both organizations. Palantir's technologies will assist the Space Force's Space Management & Control program at the National Space Defence Center and the Combined Space Operations Center. The Air Force will use Palantir's market research technologies to assist their "Project Brown Heron" data collection infrastructure. Palantir will process data for NORAD-Joint NORTHCOM's All Domain Command and Control (JADC2) improvements, concentrating on "consuming and modeling high-scale data" for covert operation implementation and scheduling. This appears to be a significant development for Palantir's government-facing operation.
Government revenues
Palantir's current Space Force and Air Force agreements will add to its expanding variety of approved and extended U.S. government contract terms, including agreements with the U.S. Army, the FDA, the CIA and ICE. That is extremely exciting for Palantir because earnings from U.S. government organizations increased by 83% year over year in the previous quarter, accounting for the lion's share of its government earnings.
However, in terms of ethics, Palantir's government partnerships are murky and contentious, with a history of being involved in the government's dirty work. That's a big red flag for a public company and could prove risky for investors. Its technologies were purportedly used to track down and assassinate Osama Bin Laden in 2011. During the Trump administration, ICE actively utilized its technologies to track down and deport illegal immigrants in a way that violated privacy rights, calling into question whether this technology was already being used to collect private data on citizens without their knowledge for both government and business purposes. This compromised image, which has prompted demonstrations from human rights groups in the past, may prohibit potential customers from utilizing Palantir's Foundry infrastructure, especially since less contentious competitors like C3.ai (AI, Financial) and Salesforce.com (CRM, Financial) provide similar cloud services.
Final thoughts
As we can see in the above chart, Palantir’s stock has had an insane runup ever since it got listed in October 2020, and it has more than doubled in value. It is currently trading at a price-sales ratio of 27.13 and a price-book ratio of 23.63, which are extremely high and there appears to be absolutely no scope for multiples expansion. The company must continue its revenue growth trajectory and achieve a higher level of profitability from the government as well as companies. There is little in Palantir’s fundamentals to state that it is a solid stock, and its valuation is all a function of the expected future growth.
There is also the issue of the heavy stock-based compensation approach adopted by the management, increasing the future dilution of shareholders. An abnormally high stock-based compensation plan indicates that the company is more concerned with the profits of exescutives than shareholders. I believe that there is little upside potential in Palantir for now, and investors who are interested in this stock should wait and watch until they get a more reasonable price.
