Palantir Technologies Inc. (NYSE:PLTR)
The stock of Palantir Technologies Inc. (NYSE:PLTR) has been a complete disaster for investors. However, it has been and continues to be one of the top trading stocks, both long and short. Selling options premium is a terrific way to make money (i.e., puts and calls). However, buy-and-hold investors have been hammered thus far. As a corporation, we believe its technology is a game changer for government and industry. However, the growth rate looks to be slowing, management has been questioned about its actions, and as a low-to-no-earnings tech business, the strong currency and increased interest rates have resulted in extended selling periods. However, we previously stated that we would be buyers at and below the $8 threshold. It’s finally time.
The Market is Still Shaky
Despite recent market stabilization, it has been a difficult month and a particularly bad 2022 for IT stocks with little to no earnings. Unfortunately, despite a market resurgence, this is still a trader’s market, and we believe that is the best way to approach Palantir for the time being. Palantir remains at all-time lows. Investors, it may take a long time to recoup losses, but a small core stake may be held for the long run.
We believe that in this volatile market, getting in and out is the best strategy to play this brand. With all of the challenges confronting Palantir, from dilution to a dubious management team, the last thing stockholders wanted was a slowdown in operations. Unfortunately, the Fed’s efforts to control inflation are telegraphing their intentions and informing us that overall growth will decrease. As a result, pressure will be put on businesses and governments. The latter is a serious concern that has resulted in downgrades.
Investors have been devastated as Palantir stock has just vanished. This is not only a company-specific issue; numerous stocks like this are down 70-80%—awful action. However, there is some rationale, not just in terms of price. Still, the Street is now pricing in the possibility that Palantir would lose money or break even for years. Palantir was highly appealing due to its rapid revenue growth. Still, that rate is currently decreasing, which poses a significant danger. Suppose you believe in technology and are an investor. In that case, you may add a tiny investment to a well-rounded portfolio or average down to enhance your cost basis.
The bottom line for investors is that profits will be obtained if management can develop Palantir financially without diluting owners. However, the comeback may take years. Therefore, we still believe that making short-term trades and scalping profits is a better strategy. At these low levels, a covered call strategy can potentially generate some cash while you wait. Regarding operations, the stock is approaching a risk-reward ratio of $7-$8 a share.
Operations Growing But Slowing
The most recent quarter was challenging, and it might be the beginning of a downward trend in performance, especially if the Fed arranges a gentle landing. However, if an actual recession occurs in Q4 and early 2023, the market may begin to bid the stock higher in the next weeks. Even though overall performance on the top and bottom lines were mixed in Q2, we believe you may purchase here in anticipation. One positive was that sales exceeded consensus projections, although EPS fell short.
Again, we are still growing here, albeit at a slower rate. Total sales increased 25.9% year on year to $473.0 million, exceeding expectations by a little over $1 million. However, earnings were missed by $0.04 per share, which was quite disappointing considering a predicted profit. Some of the solutions can be found in sector-specific findings. Commercial revenue continues to expand significantly, but government revenue appears to be declining.
While commercial expenditure ‘may’ decrease significantly in a downturn, government business growth has already slowed. The government segment’s revenue increased to $263 million in the second quarter. This was a 9% increase over the previous quarter. One bright spot is that health care (both government and commercial) has grown into a significant and quickly expanding industry, earning around $153 million in revenue in the first half of 2022, up from $42 million in the first half of 2020. Growth is reasonable.
Strong Gross Margin
Palantir’s margins were exceptionally solid if there was one huge positive in the quarter. Earnings were difficult owing to operating expenditures, but the gross margin is noteworthy, and we believe it will stay strong this year. The adjusted gross margin, which excludes dilutive stock-based compensation charges, was a healthy 81%. Operating margins were also high. The adjusted operating income was $108 million. This translated to a solid adjusted operating margin of 23%, which was well above management’s prior estimate of 20%. As previously stated, adjusted profits per share were a loss of $0.01. Some of this was due to a $0.05 effect, primarily due to losses on securities owned.
Guidance Was More Than Disappointing But is Now More Than Priced In
The most pressing problem is not value, even though we believe all available data has been sufficiently priced. The primary source of concern is not stock-based compensation or Q2 earnings results. Instead, the danger is a business downturn. As management sees it, the Q3 forecast fell short of expectations. For the current third quarter of 2022, Palantir “expects sales of between $474 million and $475 million,” which is significantly lower than the consensus of $505 million. That implies revenue in 2022 might be 5% lower than planned. That is why the stock was crushed. For the fiscal year, management predicted “sales of $1.9 billion,” compared to the consensus of $1.98 billion. The adjusted operating income should range between $341 million and $343 million.
Buying Some Here
Palantir is involved in big data, a new and crucial commodity. Traders have won here time and again, and while growth will continue and the balance sheet is strong, we must keep an eye on the rate of client growth and contract values. And while the firm innovates and assists its clients in understanding data and making decisions, it has been a complex investment area. With the expected inflation report and the FOMC meeting next week, we believe the market will be turbulent this week. This might be available for as little as $7.
Entering there and riding a brief rally might position you to sell covered calls for a good income. However, the volatility is significant, and the premiums are large. Alternatively, if we fall again, sell a month or two out of the money options. You have a solid entry price if you are assigned and may instantly sell calls. If there is too much trading around the position, just purchase and wait for a 5-10% gain before exiting. Continue to trade the name, or acquire a few shares and return in 10 years.
Featured Image- Megapixl @Timonschneider