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Palantir: Gross Absurdity

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Palantir (NYSE:PLTR) released disappointing Q2 numbers around two weeks ago. Its net losses remained, and sales growth stagnated. However, in an apparent overreaction to its quarterly results, the stock dropped about 25% in subsequent trading sessions. In this post, I’ll highlight some essential positives in Palantir’s Q2 results that no one seems to be talking about. Then, I’ll try to explain why the stock is a solid purchase at the moment. But, first, let’s take a deeper look to better grasp what’s happening.

Profitability New Growth

The company’s negative bottom line was one of the primary factors that caused panic selling among Palantir stockholders. During the quarter, the business posted a net loss of $179.3 million, or $0.09 per share, leaving investors concerned about the company’s breakeven threshold, especially during macroeconomic instability. Palantir has been in business for almost 18 years, and shareholders are losing faith in management’s ability to produce a profit. While I appreciate the shareholder’s dissatisfaction, the truth is that reality isn’t all that horrible on the ground.

As previously stated, Palantir’s net loss of $179.3 million was primarily due to non-recurring “other expenditures.”

Other income (expense), net changed by $137.9 million for the three months ended June 30, 2022, principally owing to unrealized and realized losses, net from our investments in marketable securities.

When we look at Palantir’s operating profitability, we get an interesting picture. Indeed, the corporation reported operational losses of $41.7 million, although this loss was reduced from $146.1 million the previous year. Palantir’s operating loss in the second quarter was $0.02 per share, down from $0.08 last year. This advancement demonstrates that Palantir is making significant and meaningful progress toward profitability. After the previous quarter, Palantir also had just $99.2 million in marketable securities. This suggests that the company worst is almost over, and its road to profitability is becoming clearer.

As a result, I expect Palantir to become profitable on an operational basis somewhere in FY23 and on a net basis sometime in FY24/25. Moreover, the firm is debt-free and retained around $2.36 billion in cash and cash equivalents last quarter, which was adequate to support operations (and its expansion goals) comfortably during these difficult economic times.

Growth Resilience

Second, Palantir’s year-on-year revenue growth in the second quarter was over 26%. While this is a reasonable growth rate, it is much lower than management’s previous growth projection of 30%. This slowing of growth has fueled all kinds of conjecture. While some bears believe the company has lost its customer appeal and is succumbing to competitive pressures, others believe Palantir has reached a saturation point and is experiencing scalability issues.

This is contradictory, given that the Fed has been raising interest rates. In contrast, businesses have had to cut back on discretionary expenditure. Moreover, although European and Asian economies have raised interest rates, the pace has not been as rapid. If anything, I would have anticipated Palantir’s growth momentum to diminish in the United States before it slowed in overseas markets. But it was not the case.

However, suppose Palantir was losing market share to its competitors and was experiencing bottlenecks with client onboarding. In that case, its sales growth should have slowed across all geographical areas. Instead, its sales growth acceleration in the US indicates that the firm is still developing well and that its platforms continue to provide value to its consumers. As a result, I believe Palantir’s revenue growth slowing is a seasonal element that persists primarily in overseas markets.

Valuation Absurdity

Bears contend that Palantir’s stock is highly overpriced and ripe for a correction. After all, its shares are trading roughly 63 times, trailing twelve-month free cash flows, which appears to be excessive at first look. But first, look at the chart below to better understand its worth.

The X-axis displays the Price-to-Free Cash Flow (or P/FCF) multiple for 130 stocks in the software infrastructure sector. Palantir is horizontally positioned slightly to the right, indicating that it trades at a tiny premium to most of its rivals. 

The message from both axis, when combined, is that Palantir’s significantly higher valuation is justified by its rapid growth rate. Investors are essentially paying a premium to possess this quickly developing corporation. However, only two other stocks grow faster than Palantir while selling at a lower P/FCF multiple.

Final Thoughts

There’s no arguing that Palantir is trading at a premium to its peers, and its slowing growth has led to a sell-off. But I consider this a temporary setback. After its recent price drop, the company is fairly valued in its industry, green shoots are growing in profitability, and its revenue growth rate is healthy in the US market. As a result, investors with a long time horizon may wish to consider acquiring Palantir shares in anticipation of market declines. Best wishes!

Featured Image : Megapixl ©  Michaelvi 

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