Palantir Technologies (PLTR), which is engaged in building software platforms for institutions that include the United States federal government,  went public on last September. The stock has gained 10.8% over the past three months to close yesterday’s trading session at $23.96 thanks to increased demand for its Foundry platform.

However, PLTR declined 9.2% in the last trading session, 17.4% over the past five days, and 37.2% since February 9, in part because insiders sold shares following the expiration of the lock-in period following the stock’s listing. Insiders were initially allowed to sell just 20% of their shares; the  limit on their ability to sell their remaining 80% expired last week. While insider stock sales don’t necessarily suggest a company’s weak prospects, PLTR’s recently released mixed fourth quarter (ended December 31, 2020) results could be a reason for worry for investors.

Moreover, the stock tumbled in yesterday’s trading session following news of a lawsuit against the U.K.’s National Health Service (NHS) over its extensions of a  contract to PLTR in December.

Here are the factors we think  could shape PLTR’s performance in the coming months:

PLTR’s Increasing Focus on Commercial Clients

PLTR has been increasing its focus on commercial clients with the help of its Foundry platform. The company announced on February 23that 3M Company (MMM) has chosen to expand its use of PLTR’s Foundry platform to support its digital transformation and improve its supply chain. Also, Akin Gump Strauss Hauer & Feld LLP collaborated with PLTR on February 18, 2021 to introduce Akin Gump’s RegSpot, a new legal digital services platform powered by the Foundry software.

International Business Machines Corporation (IBM) and PLTR announced a new partnership on February 8. The partnership consists  of IBM’s hybrid cloud data platform, which is designed to deliver artificial intelligence (AI) for business with PLTR’s next generation operations platform for building applications. Further, on January 28signed a multi-year enterprise agreement for its Foundry Platform with Rio Tinto Limited (RTNTF), one of the world’s leading mining and metals corporations.

Mixed Recent Financials

PLTR’s top line climbed 40.4% year-over-year to $322.09 million for the fourth quarter ended December 31, 2020. Its gross profit also increased 63.9% year-over-year to $251.59 million for the fourth quarter. However, the company reported a $156.57 million loss from operations for the fourth quarter of 2020, which widened from its loss from operations of $147.45 million during the fourth quarter of 2019. Furthermore,  PLTR reported a net loss of $148.34 for the fourth quarter of 2020.

Stretched Valuations

In terms of non-GAAP forward price/earnings, PLTR is currently trading at 167.78x, significantly higher than the industry average  26.76x. In terms of forward enterprise value/sales also,  the stock’s 30.38x is 592% higher than the industry average  4.39x. The stock’s forward price/sales of 31.45x is also higher than the industry average  4.22x.

Wall Street analysts expect the stock to hit $14 in the near term, which represents a potential decline of nearly 47%.

POWR Ratings Don’t Indicate Sufficient Upside

PLTR has an overall rating of C, which equates to Neutral 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. The stock has a C grade for Growth, consistent with mixed earnings growth estimates by Wall Street Analysts. While  its EPS for the current year is expected to decline 20% year-over-year, it is expected to increase 31.2% next year.

PLTR has a C grade for Quality also.  While the stock’s trailing-12-month gross profit margin of 67.7% is impressive, the stock has negative values for ROE and ROA.

Click here to see PLTR’s ratings for Value, Momentum, Stability and Sentiment as well.

Of 13 stocks in the D-rated Software – SAAS industry, PLTR is ranked #7.

Click here to access two stocks in the same industry whose prospects seem to be better than PLTR.

Bottom Line

In business for more than 17 years, PLTR has found a market niche for itself but it has been increasing its focus more on its commercial clients. While the company’s revenue has increased for the last-reported quarter (ended December 31, 2020), the company  has failed to generate net income. Moreover, despite the recent sell-off, PLTR is trading at a premium valuation. So, we think investors should wait for better entry opportunities.

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PLTR shares were trading at $23.86 per share on Friday morning, down $0.10 (-0.42%). Year-to-date, PLTR has gained 1.32%, versus a 2.52% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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