Down 25% from its peak, is Palantir Stock a smart buy?

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Palantir Technologies (NYSE: PLTR) has quite a story. Often referred to as Silicon Valley’s top-secret startup, the company began by creating software for the U.S. intelligence community. In fact, the Pentagon and the CIA have deployed Palantir’s Gotham platform in Iraq and Afghanistan, where it is said to have played a role in helping the government locate Osama bin Laden.

Fittingly, Palantir is named after a magical artifact of The Lord of the Rings, an indestructible and ubiquitous crystal ball. Despite this fantastic namesake, the stock has taken a hit recently, and the stock price is currently 30% below its all-time high. At this reduced price, is Palantir a smart buy? Let’s dive into it.

Image source: Getty Images

Market opportunity

Palantir is a software company with two different customer-oriented platforms: Gotham and Foundry. The first is aimed at government agencies, particularly those in the defense and intelligence sectors; the latter was designed for commercial enterprises and has been adopted in more than 40 industries.

In either case, Palantir’s software helps clients integrate and analyze siled datasets. It empowers data scientists to build AI models and applications, and it empowers executives to make data-driven decisions. For example, manufacturers like Airbus use Foundry to optimize supply chains and utility companies like PG&E use it to manage stocks and electrical networks.

In short, Palantir helps its customers make sense of big data, and then use that information to take appropriate action. To this end, management assesses its market opportunity at $ 119 billion, of which $ 63 billion is in the government sector and $ 56 billion in the commercial sector.

Competitive position

Palantir is more than a data analysis engine. Its platform also helps customers secure and control access to data, as well as track how data is used. And if Palantir’s past is any indicator, the company has a knack for protecting sensitive information.

Case in point: The Gotham platform was secure enough to handle national secrets, a benchmark few other companies can boast of. And if Palantir met CIA and Pentagon security standards, it seems unlikely that any organization in the commercial sector would object.

But Palantir also has another advantage. Its third platform, Apollo, gives the company an edge over most software as a service (SaaS) vendors. Apollo is a continuous delivery system designed to keep Gotham and Foundry up to date at all times. It also allows Gotham and Foundry to operate in atypical environments. While most SaaS products can only be deployed in the public cloud, Palantir’s SaaS can be deployed in public clouds, private data centers, and even classified networks. This gives the company an edge in highly regulated industries.

For example, healthcare facilities and financial service providers cannot store certain data in the public cloud (for example, patient or customer specific information), which means these companies may not be able to ” use traditional SaaS products. But they can deploy Palantir’s software on-premise, where the Apollo platform can still deliver all the benefits of a SaaS business model.

Financial performance

The digital transformation has triggered an explosion of new technologies and modern businesses are generating data at an incredible rate. Companies that can harness this data and unlock its value will have an edge over their peers. And that’s exactly why Palantir exists.

Not surprisingly, the company has shown solid revenue growth during its short tenure as a public company. And while not profitable on a generally accepted accounting principles (GAAP) basis, it has generated $ 61.7 million in free cash flow over the past 12 months, demonstrating the sustainability of its business model.

Metric

Q2 2020 (TTM)

Q2 2021 (TTM)

Switch

Customers

137

169

23%

Returned

$ 901.1 million

$ 1.3 billion

47%

Source: Palantir SEC Deposits, YCharts. TTM = 12 rolling months.

Currently, the biggest red flag is the number of Palantir customers, which remains relatively low. In turn, the average revenue per customer stands at $ 7.9 million, and while no customer accounts for more than 10% of revenue, that figure is still quite high. In other words, losing even a few clients could cause problems for Palantir.

Still, things seem to be moving in the right direction. During the last quarter, turnover increased by 49%. Palantir has also completed 62 deals worth $ 1 million or more, and the company has grown its commercial customer base by 61% in the first half of 2021.

The bottom line

Palantir shares are currently trading at 31 times sales; but the company has established a strong brand and a solid competitive position, and it enjoys a huge market opportunity. Despite Palantir’s low client base and relatively concentrated revenues, management is executing a solid growth strategy. From that point of view, I think this stock is a worthwhile long-term investment.

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Trevor Jennewine owns shares of Palantir Technologies Inc. The Motley Fool owns shares and recommends Palantir Technologies Inc. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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