It seems like Palantir (NYSE:PLTR) is once again surrounded by fear, uncertainty and doubt. Earlier this month, a class action lawsuit was filed against the company and 3 of its key executives, on the basis that they misled investors and/or provided false information. While this is bad news for Palantir and its shareholders, it's not necessarily a death knell. In this article, I'll attempt to discuss the said filing in detail and explain what it means for investors going forward. Let's take a closer look at it all.
Let me start by saying that several law firms have put out press releases in recent days, announcing the filing of a class action lawsuit against Palantir (like here, here and here). The lawsuit has been filed on behalf of investors and entities who held Palantir's shares between November 9, 2021 and May 6, 2022. The complaint claims that Palantir's key personnel issued false, incomplete and/or misleading statements about their business prospects, which subsequently led to shareholder losses.
According to the lawsuit, throughout the Class Period, defendants made false and/or misleading statements and/or failed to disclose that: (1) Palantir's investments in marketable securities were having a significant negative impact on the Company's earnings per share ("EPS") results; (2) Palantir overstated the sustainability of its government segment's growth and revenues; (3) Palantir was experiencing a significant slowdown in revenue growth, particularly among its government customers, despite ongoing global conflicts and market disruptions; (4) as a result of all the foregoing, the Company was likely to miss consensus estimates for its first quarter 2022 ("Q1") EPS and second quarter 2022 ("Q2") sales outlook; and (5) as a result, the Company's public statements were materially false and misleading at all relevant times. When the true details entered the market, the lawsuit claims that investors suffered damages.
Bear in mind that Palantir may have navigated its way through muddy waters now but the complaint is based on its management's past actions. For instance, in my prior article, I explained how Palantir's losses due to marketable securities won't be significant going forward. But the complaint is over the fact that these losses due to marketable securities adversely affected the EPS and investors weren't aptly warned about it beforehand.
(Read - Palantir: Peak Absurdity)
As of September 30, 2021, we had investments valued at $148.1 million in marketable securities. We may continue to make additional investments or sell the existing investments. These investments are often in early or growth stage companies that have minimal public trading history; as such the fair value of these investments may fluctuate depending on the financial outcome and prospects of the investees, as well as global market conditions including recent and ongoing volatility related to the impacts of COVID-19.
But then again, I couldn't find any body of text where Palantir specifically stated how the fluctuating value of marketable securities would impact its overall EPS. So, in theory, there might be a claim to be made here. Besides, the original complaint also alleges that Palantir's management overstated the resilience of their government business during times of war and economic uncertainty, but they missed the Street's estimates in Q1 and Q2 2022 when such situations actually emerged. So, the complaint seeks a compensation for the losses due to Palantir's plummeting stock price.
For the record, the complaint names 3 company executives in the document, namely Alexander Karp (the CEO), David Glazier (the CFO), Shyam Sankar (the COO). But having said that, this begs the question - how does this class action lawsuit impact Palantir's new shareholders?
I'll cut to the chase -- nobody knows how this will play out exactly. We can debate on the merits of the complaint but we can't reliably predict what's actually going to happen at the end of the day. It's important to note that the complaint used the sections 10b and 20(A) of the Securities and Exchange Act, to allege that Palantir has provided false and/or misleading information to shareholders. Firms like this frequently use these particular sections when filing cases against public companies. Usually, three scenarios play out here.
So, either of the three scenarios can play out and we can't presume which one will be most dominant of them all. Also, if a settlement is awarded and/or agreed upon, we don't yet know the dollar-amount for it yet. This introduces a new level of uncertainty, that didn't exist till a few months ago, for Palantir's new investors. This isn't optimal for investors with a low-risk appetite and they may want to refrain from initiating any new positions in the name, for the time being at least.
However, as far as my educated guess goes, I think it'll be difficult for the complainants to make a strong case against Palantir. Nearly all companies across the globe were caught off-guard with the rapid macroeconomic turmoil (rising interest rates, raging inflation, heightened geopolitics due to Russia's war) that unraveled in the first half of this year. As a result, companies across different industries ended up missing the Street's estimates in Q2 and Palantir isn't the odd one out. Bear in mind that I don't have a legal background and this is just my opinion of the matter.
But due to the aforementioned reasons, I'm of the opinion that existing investors with some tolerance for volatility, risk and portfolio drawdowns, may want to keep holding their Palantir's shares instead of selling in panic. Good Luck!
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.