Palantir Technologies (NYSE:PLTR) has announced a few impressive commercial deals in recent months, and there are signs that its government business could be more “sticky” than I previously believed. Nevertheless, given my continued concerns about the company’s profitability, competition, and valuation, I remain bearish on PLTR stock.
Meanwhile, the stock’s valuation is still quite high and its competitive advantage in a crowded market is questionable. So, if you have a position currently I think you should sell. And if you’re thinking about adding one, I’d hold off for the time being. Or maybe just avoid it all together.
Let’s dig into some of the reasons why.
Impressive Private Sector Deals and Solid Public Contracts
Will Ashworth, another InvestorPlace contributor, recently noted that Palantir had signed a huge deal with South Korea’s Hyundai Heavy Industries. Ashworth reported that, “The two companies are working to build a big data platform for HHI’s core businesses, including shipbuilding, offshore structures, naval shipbuilding, and marine engines.” And importantly, he pointed out that Hyundai Heavy anticipates that it will obtain $17.4 billion of orders this year. In other words, this Korean company is pretty huge, so the deal is likely to be fairly large as well.
Meanwhile, on Dec. 7, Palantir announced that it would work with German healthcare company Merck (OTC:MKKGY) to tackle several issues, but primarily with their chip shortage. Germany’s Merck is not nearly as large as America’s pharmaceutical giant with a similar name (the two companies parted ways many decades ago). But the German company is still sizeable, as its market capitalization is over $90 billion, according to Yahoo Finance.
Finally, on Dec. 20, Palantir announced that it was partnering with a small drug maker, Dewpoint Therapeutics. The deal, in tandem with the Merck announcement, indicates that Palantir can generate a great deal of revenue from pharmaceutical companies going forward.
Although I, along with a number of Wall Street analysts, have been concerned about the outlook of Palantir’s government business, the company has won several important deals from the Federal government recently. For example, on Dec. 17, Palantir noted that the U.S. Army had decided to extend its partnership with the company on the Army’s data analytics platform. And earlier that month, Palantir announced that it had won a new, $43 million contract with the Space Force’s Space Systems Command (SSC).
Profitability and Competition Are Still Worrisome
In multiple, past columns, I’ve noted that Palantir prints a great deal of red ink, particularly if its huge amounts of stock-based compensation are factored into the equation. For example, in the third quarter, it lost $385 million, if the approximately $283 million of stock that it issued are factored in.
I’ve also previously hypothesized that, given the significant number of defense contractors that use artificial intelligence and the fact that there are multiple data analytics companies, Palantir faces a great deal of tough competition. Supporting that belief, I have been unable to identify any major competitive advantages that Palantir has over its rivals.
Moreover, I recently found a 2018 Wall Street Journal article which shows that, historically, Palantir has been willing to lose money on its private-sector contracts which tend to be quite labor-intensive. And finally, Palantir does not divulge the value of most of its private-sector deals. Taken together, this information leads me to believe that the company’s commercial deals may not be very profitable.
Addressing his company’s stock-based compensation, Palantir chief executive officer Alex Karp in November correctly stated that to attract the best tech employees, companies have to pay a great deal of compensation. I agree with that point. But I think that, by using so much stock to pay its employees and then excluding the shares from its profit-and-loss calculations, Palantir is not being as transparent with investors as it could be. And, as Seeking Alpha noted in November and I’ve pointed out in many past columns, the company’s huge stock-based compensation totals do weigh on PLTR stock.
The Bottom Line on PLTR Stock
Palantir has made some impressive deals lately. Still, I continue to have concerns about its competition and profitability.
What’s more, despite the stock’s tumble in recent weeks, the shares are still trading at an elevated valuation of 15 times analysts’ average 2022 top-line estimate. Therefore, I continue to recommend selling PLTR stock.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, Ford, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.