Palantir Q4 21 – On the radar

The lack of profit is getting on investors’ nerves

• Palantir picked a bad day to slightly disappoint as the general risk-off sentiment around Ukraine greatly amplified Palantir’s punishment potentially creating an opportunity.
• Q4 21 revenues / EPS were $433m (up 34% YoY) / LOSS$0.08 compared to consensus at $418m / LOSS$0.05.
• Guidance for the coming quarter was also very slightly soft with revenues of $443m and EBIT margins of 23% which compares to consensus of $439m / 28%.
• The company still expects to grow revenues by around 30% YoY until 2025 at which point much more of the 80% gross margins will fall through to the bottom line.
• However, as usual, the market did not care about the long-term and in a general risk-off session that sold Tesla off by 5%, Palantir got hit to the tune of 14%.
• The shares are now 66% off their all-time highs and just 11% above their IPO price of $10 in September 2020.
• Assuming that the company makes its 2022 target of growing 30%, this would put the shares on a 2022 EV / revenue of around 10x.
• While this is not cheap by any stretch of the imagination, it is both a third of where it was one year ago and now far cheaper than many other companies in the technology sector.
• It has a pretty solid growth story which combined with its 80% gross margins and healthy cash flow means that it could start making a net profit at any point in time.
• The reason that it is not making money is because it has decided to reinvest its profits in growing the business where its expansion outside of government business has been more difficult than many had hoped.
• Palantir is almost back at a level where it is worth considering it on the fundamentals.
• The company is relatively unopposed in its space meaning that its position in the market for corporate intelligence is reasonably secure.
• There are some start-ups who make claims on Palantir’s skill set but no one has yet mounted a serious challenge.
• This gives me confidence that the 80% gross margin that the company enjoys will remain intact in the medium term.
• Its exposure to longer-term contracts also means that its visibility is quite good which gives a greater degree of confidence in the long-term forecasts to 2025.
• This means that the fundamentals have not changed that much over the last year but now these same assets are on sale at 66% off.
• In the current more risk-averse and high inflation environment, it is not inconceivable that Palantir continues to go lower as it is very far from what one would consider to be a value stock.
• I also see a number of more compelling propositions out there and so I am holding off for now, but this should very much now be on the radar.