Palantir Stock – New Market Environment, Old Problems (NYSE.PLTR)

Intro & Thesis

I have published 3 articles about Palantir so far (NYSE:PLTR) on Seeking Alpha – the last one is from early November. The stock has fallen an average 51% per year since then.The market has corrected by only 4.71% (also an estimate):

It is not possible to say that I predicted the fall in PLTR – rather such a deep correction occurred against the backdrop of the Nasdaq Composite’s fall, which is currently 20% below its November highs.

However, I believe that the facts I highlighted in my articles were the main reason PLTR fell so low. I wrote about the dilution in shareholder value due the continuation of the SBC program, the severe discrepancy in revenues and expenses, and a grossly inflated PLTR valuation as if the company would be the only IT provider in U.S. defense. Many investors might be wondering if it is worth buying the stock on the dip now that Palantir has lost half its November capitalization.

My thesis has been updated by looking at the new corporate data. Palantir still has the same problems as it did before, but now it must operate in a more difficult market environment where unprofitable businesses are likely to continue losing their market value.

Why is that so?

Today’s most important characteristic is the difficult availability of additional growth capital. IT startups that are unprofitable or not yet listed on a stock exchange are forced into raising new rounds of capital at a lower valuation to keep their operations afloat.Rounds down“).

It’s the same for companies already listed that aren’t making a profit. If they don’t have enough to pay the bills, they will either take on debt or dilute existing shareholders’ stakes or reduce production.

Despite Palantir’s recent revenue and gross margin growth, Palantir failed to become an operationally profitable company. In fact the company increased the divergence in revenue and net income in Q4 2021.

Bulls might be apprehensive, but the company generated positive operating cash flows (CFO) throughout the year. And that’s correct – CFO was $333.8 Million for the full year 2021. This is impressive given the $296.6M outflow in 2020.

We need to understand the reasons for the impressive growth in CFO items – it is all due to stock-based compensation which was $778.2million in 2021

PLTR’s management decided that debt financing was not an option to SBC. Therefore, it continues to increase the number and value of its shares each quarter.

This is something I’ve written about before and will repeat it now: PLTR’s business model, which was essentially IT consulting, is heavily dependent on its employees. The company will need to work hard to keep them, given how dependent they are on their employees. The tech sector is seeing wages rise rapidly. due to inflation.

You can only get them to stay if you continue to give them stock options, and dilute future EPS. Despite the potential revenue and contract growth, I think the current EPS projections may be a bit exaggerated. The downgrade trend that started in early 2022 and will likely continue in future quarters will likely push the company’s valuation lower.

Talking about Palantir’s valuation, by the way:

It is absurd to give 12 times the sales projections for a company which continues to lose money while inflation in America is already above 8.8%. Valuation is a controversial topic. Each person must decide who is willing to pay what amount. One way to determine the fairness of valuation is to do a comparative analysis between the market multiples and business growth ratios. Similar analysis was done in my article on PLTR. I concluded that the stock of this company was overvalued by 70.20%. Perhaps Palantir’s operations have grown and the stock has fallen 51%.

Unfortunately, for bulls, this is not possible:

Source: Calculations by the author using Seeking Alpha data

Let’s talk a bit about the calculation method. The company’s revenue structure is composed of “Government” (58.2%), and “Commercial” (41.8%) segments. These weights were taken from the most recent financial report. I identified the most comparable companies in each group and calculated their price-to sales ratios for the next year. I also calculated their revenue growth figures for their most recent quarter (YoY). I then expressed the average/median markets multiples in terms the average/median growth rate and multiplied them by the shares of sales mix. The weighted average was 7.96x, which 34.31% lower than Palantir’s current P/S (FWD), of 12.11x.

All of this leads me to conclude that Palantir’s business model does not allow it to reposition itself in the current reality. As it is forced to finance itself through additional shareholder dilution, shares will be under severe pressure over the next months.

However, my conclusion comes with risks

I could be wrong about the high demand for the company’s services. In one of my previous articles, I suggested that U.S. defense companies could soon experience an influx of investors due to the conflict in Ukraine and the general backdrop of a volatile geopolitical environment. Analyzing various ETFs can already show this influx.

However, Palantir is still far behind the defense giants and defense industry as a whole. The effect of overvaluation will likely be stronger than the future growth prospects.

My thesis also faces the risk that PLTR could rise in the face of a recovery by the technology sector. The sector has been declining since November and remains quite depressed.

However, I believe that growth will be short-lived due to too many problems in the global economy. A Palantir-style overvaluation will not be tolerated by the markets. The only conclusion is that the risk-reward ratio won’t be in the favor of shareholders as quickly and as often as many bulls anticipate.

Happy investing! Stay healthy!