Palantir: The Market Has Lost Its Mind

Summary

• There’s a case to be made that the recent depreciation of Palantir Technologies Inc.’s share price is unjustified.
• Palantir’s latest earnings report indicated that the company’s commercial offerings are likely to be in high demand in the foreseeable future.
• There’s also a high chance that Palantir would be able to successfully weather the upcoming macroeconomic and geopolitical challenges, which could result in the appreciation of its stock.
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Scott Olson

In recent months, the market has greatly punished Palantir Technologies Inc. (NYSE:PLTR), as its shares currently trade at distressed levels despite the fact that the company continues to generate double-digit returns in the current turbulent environment. While in part it makes sense considering that a large portion of growth names have suffered a similar fate so far due to various macroeconomic issues, Palantir’s latest decline nevertheless is not justified in my opinion.

Even though we might be on a brink of a global recession, the company’s latest earnings report indicated that there’s a great demand for its commercial software offerings, which could help the business to weather the upcoming challenges with relative ease. Add to this the fact that in recent months we’ve seen an increase in demand for Palantir’s software offerings that mitigate the supply chain disruptions in particular and help customers tackle the geopolitical challenges as well, and it becomes obvious that the business is more than likely to continue to deliver aggressive returns in the foreseeable future. That’s one of the main reasons why I continue to be bullish on the company and hold its shares in my portfolio.

Commercial Business Continues To Deliver

A month ago, shortly after the release of Palantir’s Q3 earnings report, I wrote an article on the company that focused mostly on highlighting the importance of its governmental software solutions to organizations, federal agencies, and institutions from the healthcare and defense sectors. As Palantir continues to tighten its cooperation with the American military-industrial complex, there’s also a case to be made that its commercial software offerings have all the chances to help the company to increase its presence within the private sector as well.

If we once again go through the company’s latest earnings report and take a look at the performance of Palantir’s commercial side of the business, we would see that the U.S. commercial revenue alone increased by 53% Y/Y in Q3, while the U.S. commercial customer count increased by 124 % Y/Y to 59 customers.

There are several reasons why Palantir’s commercial business is experiencing such growth at a time when the worsening macroeconomic environment along with a more hawkish monetary policy of the Federal Reserve had already diminished the ability of most private businesses to generate the same aggressive returns that they were generating a year or two ago.

First of all, in recent quarters, Palantir has greatly improved the performance of its Foundry platform, which is being used by companies and organizations to better make data-driven decisions when running their day-to-day operations. The latest FoundryCon event has served as an example to others of the capabilities of Palantir’s software for commercial enterprises, as it highlighted the practical uses of Foundry in the daily life of several Fortune 500 companies.

Secondly, it appears that Palantir’s Apollo platform, which became a standalone product only a year ago, has already been able to expand the company’s total addressable market ("TAM"). Back in October, I wrote an article dedicated solely to the capabilities of Apollo and how it could help Palantir solve the issue of the slow onboarding of customers and increase the growth of its overall customer count at the same time. Considering that in Q3, Palantir’s total customer count was 337, up by 66% Y/Y, it appears that Apollo is indeed helping Palantir to solve its scalability issues, which helps the business to continue to generate aggressive returns in the current turbulent environment.

Add to this the fact that a couple of weeks ago even Lockheed Martin (LMT) announced that it’s teaming up with Palantir to improve its capability to release its own software updates via the use of Apollo, and it becomes obvious that Palantir’s software is likely to remain in high demand for a while. Thanks to this, it’s safe to assume that the company would be able to continue to generate aggressive returns and increase its governmental and commercial customer count even in the current environment.

The Changing Structure Of World’s Supply Chains

Just as it’s the case with governments, which began to gradually decouple from China and Russia in order to stop over-relying on adversaries, the same appears to be true for private enterprises that started to actively diversify their supply chains in order to mitigate any geopolitical risks. Companies such as Apple (AAPL) are already actively relocating parts of their production to countries such as India, while the latest data indicates that the U.S. manufacturing orders from China have declined by 40% either due to the demand destruction or due to decoupling. This indicates that we’re already witnessing how the world’s supply chains are being reshaped right in front of our eyes as globalization unravels.

The good news is that Palantir offers a great supply chain solution to enterprises that are actively trying to mitigate global risks. Built on the Foundry platform, Palantir’s supply chain management software can be integrated into any environment and help businesses transform their supply chains without causing any major disruptions. Earlier this year, companies such as Micron (MU) and Hyundai (OTCPK:HYMTF) already started working with Palantir on their own supply chain projects, while the Tyson Foods (TSN) CTO recently explained how they were able to achieve $200 million in value savings by transforming their supply chains with the help of Palantir.

Considering this, it’s safe to assume that in the current changing geopolitical landscape, Palantir is more than likely to continue to increase the number of its clients, which should result in the continuous improvement of its top-line performance and the subsequent appreciation of its shares.

As of today, Palantir expects to generate ~$1.9 billion in revenues in FY22, which translates to a Y/Y growth of ~23%, while the street believes that the fair value of its stock currently is $9.74 per share. My two DCF models show that Palantir’s fair value is $10.03 per share and $12.08 per share in the conservative and optimistic scenarios, respectively, which indicates that in any of the scenarios its shares are undervalued and offer a decent upside at the current levels. Add to this the fact that Palantir has been decreasing its stock-based compensation expenses on a quarterly basis while its revenue improved and there’s a fair chance that its shares could significantly appreciate once the market conditions improve.

Risks

In the past, I’ve already stated that due to the hawkish monetary policy of the Federal Reserve, which could result in a severe recession, Palantir’s stock could continue to trade at the current distressed levels for a while until the overall conditions improve.

At the same time, I don’t expect the company to show profitability on its books anytime soon, which is a major downside for lots of value investors. While the company itself is greatly profitable on an operational level and with no debt along with $2.4 billion in cash reserves it’ll more than likely be able to weather the upcoming macroeconomic and geopolitical challenges with relative ease, the cost of retaining talent to aggressively grow the business is relatively high, which negatively affects Palantir’s bottom-line performance. Considering that the unfavorable market environment has already negatively affected the share prices of various growth names, investors shouldn’t expect a rapid appreciation of Palantir’s stock price in the coming months.

The good news though is that Palantir has been cutting its stock-based compensations for a while already and at the same time has been actively accelerating hiring at a time when tech companies are cutting jobs, which indicates that the demand for its governmental and commercial offerings is likely to remain high. If that’s the case, then we should expect Palantir to continue to scale its business and aggressively grow its top-line performance. Once the overall market conditions improve, Palantir’s stock has a reasonable chance to once again begin to aggressively appreciate.

The Bottom Line

Despite the latest depreciation of its share price, Palantir itself has proved that it can continue to grow its business at a double-digit rate despite the volatile macroeconomic and geopolitical environment. The aggressive growth of its commercial business coupled with the increased demand for software that could mitigate the downside of supply chain disruptions indicates that the company is more than likely to tackle the upcoming challenges with relative ease and continue to increase the number of its clients at the same time. Therefore, I continue to hold its shares in my portfolio and believe that the market is unjustifiably punishing its stock.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of PLTR either through stock ownership, options, or other derivatives. 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.

Bohdan Kucheriavyi and/or BlackSquare Capital is/are not a financial/investment advisor, broker, or dealer. He's/It's/They're solely sharing personal experience and opinion; therefore, all strategies, tips, suggestions, and recommendations shared are solely for informational purposes. There are risks associated with investing in securities. Investing in stocks, bonds, options, exchange-traded funds, mutual funds, and money market funds involves the risk of loss. Loss of principal is possible. Some high-risk investments may use leverage, which will accentuate gains & losses. Foreign investing involves special risks, including greater volatility and political, economic, and currency risks and differences in accounting methods. A security’s or a firm’s past investment performance is not a guarantee or predictor of future investment performance.