Market participants appear pleased with the U.S. government’s stimulus measures and improving economic data. Consequently, the stock market is continuing its incredible rally this year, except for a few short-term pullbacks. However, as consumer spending steadily returns to pre-pandemic levels, rising inflation has started to worry investors.
Though the Fed views any rise in inflation as temporary, economists fear that rising inflation might force the central bank to tighten its policies earlier than expected. Adding to this concern, some retail investors are speculating that wealthy investors have started to take profits now, ahead of the government’s proposed increase in capital gains taxes. As such, some investors are rotating away from equity to safer and fixed-income assets. Consequently, overheated stocks, especially in the tech space, have already started witnessing a correction.
The short squeeze frenzy triggered by millennial investors on Reddit’s r/wallstreetbets (WSB) chatroom has piqued the interest of retail investors and Wall Street analysts in following the stocks discussed on the forum. Because WSB favorite stocks usually possess weak fundamentals, analysts are pessimistic on the prospects for Palantir Technologies (PLTR), DraftKings Inc. (DKNG), and Virgin Galactic Holdings Inc. (SPCE). We believe a much-anticipated market sell-off may bring them back to earth soon. So, it’s wise to get rid of these stocks now.
Palantir Technologies (PLTR)
PLTR is a data analytics company that builds and deploys software platforms for the intelligence community in the United States. The company primarily serves the U.S. government, and has partnerships with several military and civilian federal agencies in addition to some commercial customers. PLTR’s stock went public via a direct public offering (DPO) and its market debut came on September 30, 2020, 17 years after the company was founded.
On May 7, the United Kingdom’s Royal Navy renewed its contracts with PLTR for its Foundry platform, to be used across a broad spectrum of areas from strategic workforce planning to supply chain management to COVID-19 response. Furthermore, the U.S. Coast Guard also extended its commitment to use PLTR’s software, earlier this month as the data management, analytics, and operations tool for its response to the pandemic.
In the first quarter, ended March 31, 2021, PLTR reported $341.2 million in total revenue, increasing 49% year-over-year. It U.S. government revenue soared 83% year-over-year, driven by a surge in the demand for AI-supported defense and healthcare data analytics. Revenue from its U.S. commercial segment also improved 72% year-over-year. However, the company is still not generating profits despite operating for nearly two decades. Its loss from operations came in at $114,014. Also, PLTR reported a net loss of $0.07 per share, and the company is not expected to be profitable for a few more years.
PLTR’s Demo Event hosted in April did not fail to impress the Street. The company showcased the application of its platforms across various industries and customers. COO Shyam Sankar recently commented that PLTR is pioneering micro models for Apollo for Edge AI. However, some of its pre-IPO government contracts, especially the one with Immigration and Customs Enforcement (ICE) to track undocumented immigrants, is still controversial. Hence, it is too early for investors to incorporate the success of PLTR’s commercial business in its share price yet.
PLTR made its debut at $10 per share, which remained more or less flat over the following months. However, the stock started rallying in November and hit an all-time high of $45 per share in January, thanks to the attention of Reddit. Unfortunately, PLTR has lost 22.3% over the past three months to close Friday’s trade at $20.75. The correction could be in-part attributable to the recent high-growth tech sell-off. In terms of forward P/E, PLTR is currently trading at 145.80x, 493.1% more expensive than the 24.58x industry average. Hence, the stock is still largely overvalued and might soon witness further weakness in the near-term.
PLTR’s POWR Ratings reflect this bleak outlook. The stock has an overall D rating, which translates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
PLTR also has a D grade for Value, Stability and Sentiment. In the 12-stock, F-rated Software – SAAS industry, it is ranked #10.
In total, we rate PLTR on eight different levels. In addition to the POWR Ratings grades I’ve just highlighted, you can see the PLTR’s ratings for Value, Momentum and Quality here.
Click here to check out our Software Industry Report for 2021
DraftKings Inc. (DKNG)
The legalization of digital sports betting and gambling is an emerging trend in the United States. Several states have been crafting and approving legislation. As such, Boston-based online sports platform DKNG, which allows users to play daily fantasy games and win cash prizes, is taking huge advantage of the burgeoning shift in attitude by various states toward legalizing sports betting.
Currently, DKNG operates in 13 states in the United States. In fact, the Ohio Senate Select Committee on Gaming has recently written a bill to legalize sports betting in the state, which it is expected to finalize l by June 30. DKNG completed a first-of-its-kind content distribution, monetization and sponsorship agreement with a content company, Meadowlark Media, earlier this month, and expanded its sports entertainment footprint. And on April 15, DKNG became an official sports betting partner of the National Football League (NFL), thereby extending its current relationship as the NFL’s exclusive official daily fantasy partner.
In the first quarter of 2021, DKNG’s total net revenues surged 146% year-over-year to $322 million. Its average monthly unique payers (MUP) for its B2C segment jumped 44% versus the prior year to 1.5 million, reflecting strong unique payer retention and acquisition across DFS, OSB and iGaming. Its average revenue per MPU came in at $65, rising 55% year-over-year. However, DKNG reported a $1.95 loss per share, compared to its year-ago loss of $0.16 per share.
DKNG’s management is confident in acquiring new customers this year and thus, recently raised its 2021 revenue guidance from a range of $750 million – $850 million to a range of $900 million – $1 billion. However, investors must acknowledge that despite posting exponential top-line growth over the past few years, DKNG is lacking profits. In addition, DKNG operates only as a digital platform and so has a major disadvantage versus its peers that have a physical footprint also.
Adding to this concern, the Ohio Sporting Betting Bill has failed to garner broad support, and some stakeholders are voicing concerns about Senate Bill 176. As a result, shares of DKNG have declined 23.2% over the past month to close Friday’s session at $224.80. In fact, the stock has declined 4.2% so far this year but has still returned a massive 54% over the past year.
DKNG’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall F rating, which equates to Strong Sell in our proprietary rating system. DKNG also has an F grade for Value, Quality and Stability. It is ranked #29 in the 30-stock D-rated Entertainment – Casinos/Gambling industry.
Click here to see the additional POWR Ratings for DKNG (Growth, Momentum and Sentiment).
Virgin Galactic Holdings Inc. (SPCE)
SPCE is a vertically integrated aerospace company that develops human spaceflight for private individuals and researchers in the United States. The company’s spaceship operations include commercial human spaceflight, flying commercial research and development payloads into space. SPEC went public in October 2019 through a special purpose acquisition company called Social Capital Hedosophia.
SPCE is the world’s first publicly traded commercial human spaceflight company. The company has dealt with multiple setbacks over the past year and had to delay the debut of its commercial service. However, SPCE successfully completed its third spaceflight on Saturday. Notably, SPCE’s last spaceflight attempt failed in December 2020 due to connectivity issues when the rocket engine that powers the space plane, called VSS Unity, failed to ignite, setting the company’s testing schedule back by months.
SPCE is still a pre-revenue company but commands a market cap of more than $5 billion. The company reported revenue of a mere $0.24 million in 2020, primarily from pre-booking income, and it has posted a gigantic operating loss of $275 million for the year. Evidently, SPCE is bleeding cash. In fact, SPCE is expected to report a $1.36 per share net loss in the current fiscal year, further widening from its $1.25 per share net loss for the full year, ended December 31, 2020.
SPCE is making progress toward commercial operations, but its ultimate success remains uncertain owing to two regulatory hurdles ahead before it can begin carrying passengers into space. The stock soared ahead of the weekend test flight and has gained 22% over the last two trading sessions to close at $21.07 on Friday. However, the stock is down 11.2% year-to-date. The company has not yet created any fundamental value due to past technical issues and is also witnessing insider stock selling by Sir Richard Branson.
It’s no surprise that SPCE has an overall F rating, which equates to Strong Sell in our POWR Ratings system. It has an F grade for Value, Sentiment and Stability. In fact, it is ranked last in the 28-stock, F-rated Airlines industry.
In addition to the POWR Ratings grades we’ve just highlighted, one can see the SPCE ratings for Growth, Momentum and Quality here.
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PLTR shares were trading at $20.97 per share on Monday morning, up $0.22 (+1.06%). Year-to-date, PLTR has declined -10.96%, versus a 12.46% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
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