Big data analytics and software company Palantir Technologies, Inc. (PLTR) offers primarily software platforms for government operations in the defense and intelligence segments. The company also offers a central operating system for companies’ data to transform the way they operate their businesses.

Although shares of PLTR have gained slightly over the past six months thanks to decent growth in its government-business revenue over the years, the stock has retreated 2.8% over the past three months. PLTR’s stock is currently trading at $24.03, 46.6% below its 52-week high of $45.

PLTR’s heavy dependence on the U.S. government business and the stock’s lofty valuation remain the key concerns for investors. These concerns, along with PLTR’s weak profitability, could cause the stock to suffer further price declines amid an investor  rotation away from tech stocks. So, here is what we think could influence PLTR’s performance in the near term:

Click here to check out our Software Industry Report for 2021

Over-reliance on Government Customers

PLTR’s business is still heavily dependent on U.S. government contracts despite increasingly enhancing its commercial business. In the first quarter of 2021, its commercial revenue rose 72% year-over-year, whereas its government revenue increased 83% year-over-year. If the company takes more  time to scale up its commercial business, and if it fails to keep winning government contracts, its growth could stall. . While its peers Alteryx, Inc. (AYX) and Salesforce.com (CRM) are rapidly expanding their analytical business capabilities and generating more revenues from commercial businesses, PLTR’s limited growth prospects could be a drawback for the stock.

Near-term Headwind

Last year, PLTR signed a two-year contract with the U.K.’s National Health Service (NHS) to provide the NHS with a software platform for the secure and timely processing of COVID-19 data. However, recently, a campaign led by Foxglove has been launched against the company to try to stop U.S. tech giants from working with the National Health Service. The patient-data sharing to manage  health data for pandemic purposes is being seen in a bad light. This could make investors nervous about the stock.

Bleak Financials and Profitability

PLTR’s total revenues increased 49% year-over-year to $341 million in the first quarter ended March 31, 2020. However, it reported a $114.01 million loss from operations, representing a 62.4% increase from the year-ago value. Also, its net loss came in at $123.47 million for this period, compared to a $54.27 million net loss in the prior-year period. PLTR’s loss per share came in at $0.07. The company’s total operating expenses increased 62% from the year-ago value to $381.14 million.

The company’s 0.5% trailing-12-month asset turnover ratio is 19.9% lower than the 0.6% industry average. Also,  its trailing-12-month EBITDA margin, ROA and ROTC came in at negative 99.9%, 41% and 54.3%, respectively. Its $107.46 million trailing-12-month cash from operations is 22.7% lower than the$138.99 million industry average.

Stretched Valuation

In terms of forward non-GAAP P/E, PLTR is currently trading at 164.54x, 537.5% higher than the 25.81x industry average. Its 30.49 forward Price/Sales multiple is 660.9% higher than the 4.01 industry average. Also, the stock’s forward Price/Cash flow ratio of 267 is significantly higher than the 22.98 industry average.

Consensus Rating and Price Target Indicate Potential Downside

Currently trading at $24.03, the stock has a 2-month consensus price target of $14, indicating a 41.7% potential downside. The stock’s price target ranges from a low of $10 to a high of $18.

POWR Ratings Reflect Bleak Prospects

PLTR 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.

Our proprietary rating system also evaluates each stock based on eight different categories. PLTR has an F grade for Value, and a C for Quality. This justifies the stock’s premium valuation and low profitability.

Also, it has a C grade for Growth. This is in sync with the company’s unimpressive  financials.

In addition to the grades we’ve highlighted, one can check out additional PLTR ratings for Sentiment, Stability and Momentum here.

Of the 13 stocks in the F-rated Software – SAAS industry, PLTR is ranked #11.

There are several top-rated stocks in the same industry. Click here to view them.

Bottom Line

PLTR’s heavy reliance on the government contracts and the controversies surrounding its deal with the U.K.’s NHS could cause the stock to witness further declines. Furthermore, PLTR’s stock looks expensive at current valuations, despite generating losses in the last reported quarter. Therefore, we believe it is a risky bet now.

Click here to check out our Software Industry Report for 2021

PLTR shares rose $0.06 (+0.25%) in premarket trading Monday. Year-to-date, PLTR has gained 2.25%, versus a 13.49% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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