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Market Insights

Stock of the week: Palantir

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For companies that don’t turn a profit, this investing environment has been ruthlessly unforgiving of late, and Palantir has been taken down with the rest.

Last week however, there were signs of life from dip buyers, and the stock did put in a 9.5% rally, following on from a couple of 5% up weeks beforehand.

However, Palantir stock is still down by 15% on the month (from the $10.52 May open price)…

Palantir

Although the price has just pushed above the 20 day moving average for the first time since March.

Palantir’s earnings report on May 5th, 2022 was initially met with dismay from investors. The stock gapped down from $9.41 and continued lower before printing lows of $6.43 and bouncing. Closing the earnings gap to $9.41) could be seen as a step in the right direction.

Onto the earnings report itself… At a glance, it’s hard to see why investors would be disappointed. Here are the highlights from Palantir’s Q1 earnings report:

Q1 2022 Highlights

  • Total revenue grew 31% year-over-year
  • Commercial revenue grew 54% year-over-year
  • US commercial revenue grew 136% year-over-year
  • Government revenue grew 16% year-over-year
  • Customer count grew 86% year-over-year

That’s some SERIOUS growth. But context is always king. Whilst total revenue grew by 31% to $446 million, Palantir’s current market cap is just over $18 billion..! With a price to earnings ratio of 68! For comparison, the price to earnings ratio of the S&P 500 is around 23.

Now, the justification for these types of ratios has always been that fast-growing companies will soon grow into their valuations. Palantir’s goal is to continue growing revenues by 30% each year, and guidance is to expect this through 2025.

If the firm hits those goals, revenues will be nudging towards $1 billion annually. Data analytics contracts with US defence and intelligence agencies are still a large part of their business, although they have made inroads in the private sector of late.

Palantir’s teaming up with Trafigura

The commodity trading giant will combine their data with Palantir’s analytical operating system (known as Foundry). They plan to build a platform to track carbon emissions for the oil, gas, refined metals and concentrates sector.

According to Reuters, Trafigura's global head of carbon trading approached Palantir with a desire to better assess indirect carbon footprints, known as "Scope Three" emissions, and the companies piloted the scheme last year.

It’s hard to imagine a world where big data and analytical tools aren’t useful. What this will mean for Palantir’s share price and valuation in the short-term is TBC.

For now at least, the larger macro picture is in focus. Two Federal Reserve policymakers recently hinted that the Fed may pause hikes and take stock of the economy in September (after hiking by 50bps at each of the two upcoming meetings in June & July).

Reading Fed communications, there’s a clear consensus among policymakers for the June & July hikes. Beyond that, the policy path is still highly uncertain.

However, if markets begin to believe that a Fed hiking pause might soon turn into rate cuts, lower interest rates (a lower cost of capital) could be seen as a positive for loss-making growth companies such as Palantir.

Not investment advice. Past performance does not guarantee or predict future performance.

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