Palantir Part 2:
$PLTR – Palantir Investment Valuation:
The only way in which I could value Palantir is through comparable analyses. This is due to the fact that there is not enough financial information available for me to predict Palantir’s future earnings. However, for a high-growth prospect like Palantir, a comparable is typically the best way to go about valuing them.
I decided to undergo 2 different comparable analyses in order to get a variety of valuations (or opinions if you will). Preferably, I would like both of these results to be consistent in terms of their fair value estimate, however, if they are not consistent, I will take the average result. I was only able to find 2 multiples/ratios that I could actually analyze due to the nature of these businesses and their lack of positive financial ratios/multiples.
This is a very common multiple among companies that are not profitable in their operations yet, like Palantir and some of these other comparable companies. By comparing Palantir’s EV/Revenue multiple to that of their competitors (listed above on the “competitors” section of this report), I found that Palantir has a fair value of $32.85/share, which implies an upside to this investment of 23.31%. This implies that given Palantir’s current price, they are undervalued, and the upside is very reasonable, however, I decided to undergo the next comparable to see if this result maintains.
By comparing Palantir’s P/B ratio to that of their competitors, I found that Palantir has a fair value of $24.87/share, which implies that there is a downside risk of 6.64% to such an investment. As you have probably noticed, these results are not consistent, therefore I have decided to take the average result to get one, final price target.
By taking the average result from the 2 comparable analyses underwent, I found that Palantir has a fair value of $28.86/share, which implies an overall upside of 8.36% to this investment. This also implies that Palantir, is in fact an undervalued growth stock, that has the potential to be one of the best undervalued stocks on the market.
My Plan for Investing into Palantir:
My plan for this investment is a little different from usual.
I see anything between $24.87/share (Fair Value of P/B ratio) and $28.86/share (average comparable) as a good chance to buy Palantir at (or below) its fair value. This helps to limit our downside risk of this investment.
However, I think the best way to play an investment in Palantir is over the long-run 3+ years. I would attempt to buy in at the above prices and hold for these 3+ years. During this time, I would re-evaluate my investment with every new financial report and piece of news to decide if it is still worth holding. Additionally, after this time I will continue to re-evaluate as new financials come out and decided when I think is best to exit (probably when their growth starts to slow/stagnate (which could take 10 years, who knows?).
Potential Risks to Palantir’s Stock - $PLTR:
- Dilution: Over the past year Palantir has experienced a lot of dilution, however, we have already attributed a great deal of this dilution to their Direct Listing. However, the 20% of dilution that was not derived from the direct listing is still quite high. As investors, we should keep an eye on their future levels of dilution to recognize any patterns/increases that we should be weary of. If these levels of dilution persist, potential investors may be scares off and current investor might sell their positions, which will hurt the share price.
- Financial Performance: This year’s financial performance was not one to be overly happy about. Although they were able to increase some pretty important aspects of their balance sheet, Palantir was still yet to make a profit, and increased their net losses by over 100%. If this poor financial performance continues, and they keep digging themselves into a bigger and bigger hole, investors will run away from this stock and never look back. However, the Q1 financial performance gives investors hope for a more profitable future, which will be discussed later.
- Bad Press: Historically, Palantir has not been looked at through a positive lens by many people investors and non-investors alike. Their first public backlash came through their involvement in deporting immigrants through Palantir’s partnership with ICE. Palantir quicky spoke out against this backlash by saying ICE took advantage of their software without proper oversight, and that they are looking into the issues, furthermore they have since declined some potential partnerships with other border agencies to avoid further backlash. There have also been numerous smaller controversies and protests that have damaged Palantir’s reputation, and if there are more large controversies Palantir’s stock could get hurt as a result of it.
- Termination of Large Contracts: Palantir’s contracts usually are terminatable, and the termination of some of their large contracts could be detrimental to their business. This will not only hurt Palantir’s revenues, but it may also send a message that Palantir’s software did not live up to its expectations, and that it may not be as good as some people think it is. This may cause potential clients to void the idea of doing business with Palantir, and overall, this is not a good look. There are many ways that this can affect the share price, from poor financials, to not meeting expectations due to the termination, so it is definitely something to watch out for.
Potential Catalysts that can Help Palantir’s Stock Price:
- Share Buybacks: Over the past year, Palantir has bought back (both directly and indirectly, in a sense) over 4,300,000 of their common shares. This is good to see as an investor, especially this early in the company (and not too long after their Direct Listing). This gives me hope that Palantir will continue to repurchase more shares in the future. This will be good for the share price as it will increase the value of existing shares, and it will be especially good for the stock price if they continue to buyback more shares each year.
- Financial Performance: Palantir’s 2020 financial report was not favourable (as discussed previously), however there were definitely some good to take out of it. Palantir increased their revenue, gross profit, and margins by a hefty amount, which is good to see as an investor, however, there was bad aspects of this report as well that made the report unfavourable. However, their newly released Q1 2021 financial report has so much more to offer in terms of good aspects of a financial report.
- Positive Press: As previously mentioned, Palantir has had their fair share of bad press that has had a small effect on their share price. However, recently Palantir has been getting better press through helping organizations like the NIH and NHS in their fight against COVID-19, and their vaccine distribution efforts. Partnerships like this help to display the positive impacts that can be derived from Palantir’s technology. Future events where Palantir can use their software for a good cause can help to combat the negative stigma around Palantir and attract more people to invest in their company. This should help their share price in the short term after these articles are released.
- Success Stories: Since Palantir have gone public, they have had a few success stories come out, I mentioned some of these stories throughout the article. These success stories show how impactful Palantir’s software can be and can show companies that they can increase revenues, production etc. just by using Palantir’s software. Any future stories like this that come out, highlighting the benefits of Palantir can help the stock soar, and potential clients to reach out and start business/inquiries with Palantir.
- Renewing Contracts: I have mentioned that the renewal of contracts can help Palantir’s share price a couple times throughout this article but why is this the case? This is because these companies that are renewing have already been through Palantir’s 3 stage business model and have experienced their software firsthand for numerous years. After their time with Palantir’s software expires they decide to renew the contract. This is good because it shows that Palantir’s software was effective enough to their business in the time they had it that it is worth these $5-15M+ contract renewals. Furthermore, these companies that are renewing already have underwent Palantir’s installation, and these clients will provide Palantir with the highest margins, which will reflect well on Palantir’s future financial reports.
- New Partnerships/Contracts (and the expansion of commercial enterprise segment): Every time that Palantir, or its partners release news that they have entered into a contract/agreement, this will help Palantir’s stock. This is because Palantir needs to keep expanding their software into new companies in order to meet their expected growth projections. Furthermore, as more commercial enterprises try Palantir’s software (and hopefully enjoy it), the more willing other companies might be to give Palantir a shot. I see their biggest potential for growth and to become a large company in their expansion of their commercial enterprise segment through Foundry. Every time Palantir gets more new clients on board it is fantastic and shows the feasibility of this segment, and as more contracts role in, more enterprises will take an interest. Furthermore, when Palantir signs these enterprises to a contract, it will help to increase their revenues, which will show up on their financial reports and hopefully help the, to beat estimates.
- IL-6 Clearance: To me, this is the least likely catalyst to come true, however the rumour mill has been turning, and people think that Palantir is close to receiving IL-6 clearance from the DoD. Obviously, this would be huge as they would be dealing with the most confidential information, this would mean that the government has the upmost trust that Palantir can store their data in the best way, and are the best suited to protect their data against breaches/hacks. If this rumour were to become reality, there is no telling how big of a catalyst this may be.