Look Palantir Technologies Inc. (NYSE: PLTR), some investors might wonder if there is an opportunity to buy the stock when it is down about 50% from the last three months. In this article, we attempt to better understand the business and estimate the fundamental value the company. This can allow us to assess whether Palantir is more suitable for long-term trading or investing.
The state of the company
Palantir is at the crossroads between development for government and commercial customers. The company has approximately 203 customers (p. 27) in total and has potentially realized that it may not be able to sustain strong customer growth in the government sector.
Currently, they seem to be pushing sales in the commercial sector to compensate for the mentioned decline in growth. It seems that finding a niche in the commercial sector will be a little more difficult for Palantir, because this sector competes with all other data analytics platforms, while on the government side, Palantir may be private and able to develop restricted technologies. While Palantir offers a valuable analytics platform that integrates with services such as SAP, CRM, etc., this field is rapidly evolving and said companies are creating their in-house solutions in order to drive out competitors like Palantir and improve their own profitability.
For Palantir to have an edge in this landscape, they need to develop high-performance proprietary technology that will protect them from the competition, when currently their services also rely on public domain statistical technologies such as multiple logistic regressions, significance testing, classification models coupled with AI vision, etc.
While it may sound like I’m criticizing the company, that’s not entirely true, heavy use of analytics will attract talent to the company and there’s good reason to suspect they’ll develop truly proprietary technology that stands out from the competition. . I think the company is a prime candidate to achieve this, but I don’t think they’re there again.
Palantir is a bit of a black box for people who have never worked with data analytics, and the company seems to have designed itself to be vague about what it does. We can suspect that if they explained it in clear terms, they would put their market capitalization at risk. This is also why we see heavy visual effects on their promotional videos, and they appear to be aimed at government officials or retail investors who may not be able to distinguish between service features and video cosmetics. .
In their last deposit (p. 22), we see that the the split between government services and commercial revenue is 59% to 41%, respectively for the last 9 months ending Q3 2021.
On the services side, Palantir currently has 3 main platforms:
- Foundry – The leading analytics service offered commercially
- Gotham – The leading analytics service offered to governments
- Apollo – Enables software developers to continuously deploy and update their software requiring government security controls such as European GDPR
Palantir’s primary approach in developing these analytics platforms is a bold one, especially in the world of “Big Data”. While most platforms prioritize fully automating machine learning solutions and delivering them through APIs, Palantir seems to prioritize the hybrid approach, where an analyst monitors the data and makes sure to act on relevant events. This is more expensive than automated analysis, but appears to magnify the value of quality to customers, which dwarfs the cost and risk of human error.
As you can see, I think Palantir has a lot to improve and grow, but they already have a foot in the technology and are among the companies that have a good chance of staying ahead of the race.
I would add that the main risk I see for the company is rapid and public technological changes that will reduce margins and be used by competitors.
In essence, Palantir is a young company (again), which has the potential to generate high cash flow for investors in the future, but the future appears to be a little further than you might expect.
With that, let’s get to the fundamentals and see what that means for the stock.
See our latest analysis for Palantir Technologies
Shareholders of unprofitable companies generally expect strong revenue growth. Palantir Technologies grew its revenue by 41% over the past year, which is an excellent performance for a young, growing company, but it may be too early to assess via sales multiples.
The company also has a gross margin of 78% and positive free cash flow of US$321 million. The high gross margin means the software solutions are cheap (not easy) to distribute, while the company can use the rest to increase sales and development. Free cash flow is also a validation of the business model and gives honest signals that earnings should converge to cash flow and the business is at lower risk of bankruptcy. It also allows the business to borrow money that is not yet profitable and invest the funds in the business.
The graph below illustrates the evolution of income and revenue over time (reveal the exact values by clicking on the image).
Ultimately, all of these numbers need to be tied together in a way that helps investors make decisions.
One way to do this is to build an evaluation model. Simply Wall St’s discounted cash flow model attempts to approximate future cash flows – estimates are hard to come by with start-ups, so take it with a grain of salt. the intrinsic value today stands at approximately $30.7 billion, or $15.3 per share – undervalued by approximately 31.6% from the current price of $10.48 per share.
Click HERE to see model details.
Having a potentially undervalued stock does not automatically mean that the price will rise anytime soon. Markets have a mind of their own and it can take a long time (if ever) for the 2 values to converge.
We must always consider market factors that may affect price fluctuations, such as:
- Depressed market mood, resulting in part from an expected contraction in the economy
- Prioritize other investments that are more resilient to expected inflation
- Reduced liquidity on equity markets
- A spike in prices resulting from demand for security services due to an evolving geopolitical situation in Eastern Europe and South Asia
What I was hoping to illustrate is that volatility should still be high and the stock is still high risk as it is in its early growth phase. This can be ideal for short-term traders or investors who are prepared to withstand volatility for a longer period.
Being part of the software side of the defense industry can also provide investors with diversification benefits, as companies like this are rare.
Key points to remember
Palantir’s business appears to be a black box by design, which drives competitors away and can intrigue retail investors. The necessary growth path for the company is the commercial sector, which is also the biggest part at risk of competition.
The stock looks undervalued, but the pace of technological change and current market sentiment don’t necessarily make it a good investment. Alternatively, seasoned traders can exploit price movements by trying to predict catalytic events in the near future.
The company has real potential to become a differentiated analytics platform for enterprise-level businesses that are tied to or have to comply with heavy government regulations.
The title also offers some diversification qualities as it focuses on the software and analytics side of defense systems.
Alternatively, you can see this free list of growing companies with recent insider buying, might be just the ticket.
Please note that the market returns quoted in this article reflect the average market-weighted returns of stocks currently trading on US exchanges.
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Simply Wall St analyst Goran Damchevski and Simply Wall St have no position at any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials.