5 reasons to buy Palantir after the drop in income

Palantirof (NYSE: PLTR) The stock recently plunged after the data analytics company released mixed numbers in the fourth quarter. Its revenue grew 40% year-over-year to $ 322.1 million, beating estimates of $ 21 million. But its net loss only edged down from $ 159.3 million to $ 148.3 million, or $ 0.08 per share, missing expected earnings by $ 0.02 per share. Its forecast for “above 30%” revenue growth in 2021 met expectations of 31% growth, but investors appeared to expect even higher numbers.

Those two red flags – along with Palantir’s high valuation and its upcoming lock-in expiration – likely sparked the sell off after the stock’s meteoric rise in the past four months. Investors who missed these gains, however, should consider buying this decline for five simple reasons.

1. Watch out for stock-based compensation

Like many high-growth tech companies, Palantir subsidizes employee salaries with stock bonuses to conserve cash. As a result, his stock-based compensation more than tripled year over year to $ 241.8 million in the fourth quarter and consumed 75% of his earnings.

Stock-based compensation often remains high after a company’s public debut, even if it’s a direct listing like Palantir’s rather than a traditional IPO, as insiders still want cash their options. But this pay ratio usually drops dramatically as a business matures.

If we were to write off these expenses, associated payroll taxes, and direct enrollment costs for the two quarters, Palantir would have achieved operating income of $ 104.1 million, compared to a loss of $ 70.1 million ago. a year. In other words, Palantir’s shortfall was not as bad as it looked, and its profitability could improve by keeping its initial costs under control.

2. Rising margins

Palantir’s adjusted gross margin, contribution margin (which excludes selling and marketing costs and stock-based compensation) and operating margin all increased in the fourth quarter and for the full year.

Non-GAAP. Data source: Palantir Q4 presentation.

These rising numbers indicate that Palantir still has a lot of pricing power and a viable path to generate stable long-term profits.

3. Increase in revenue per customer

In the fourth quarter, Palantir signed 21 contracts worth $ 5 million or more, including 12 contracts worth $ 10 million or more. His main successes have included chords with Rio Tinto, PG&E, BP, the US military, the US Air Force, the FDA and the NHS. He also got a major contract with IBM in the current quarter.

Palantir’s average revenue per customer increased 41% to $ 7.9 million for the full year. The average revenue of its top 20 customers also increased 34% to $ 33.2 million. This expansion indicates that Palantir’s “acquire, expand and scale” model – in which it secures one customer with one service to sell others over the long term – is paying off.

For example, the US military, which is already using Palantir’s Gotham platform in front of the government to plan missions, signed a new AI contract, renewed an analysis partnership, and signed a new contract to modernize its stations. ground with Palantir in the past year only.

The FDA and other agencies are also strengthening their ties with Palantir, which will likely help them achieve their long-term goal of providing the “default operating system for data across the US government.”

4. Break down two bearish arguments

For the full year, Palantir’s government revenue grew 77% to $ 610 million and accounted for 56% of its revenue. This growth contradicts the bearish idea that its government operations are running out of room for growth.

Meanwhile, Palantir’s commercial revenue, which comes primarily from its enterprise platform Foundry, rose 22% to $ 482 million. Of that total, its US trading revenues more than doubled. This growth contradicts the bearish claim that Palantir will struggle to expand its business operations in order to reduce its reliance on government contracts.

Palantir still faces indirect competition from other data processing companies such as Alteryx (NYSE: AYX) and Salesforce (NYSE: CRM), but Palantir’s government-hardened reputation and its aggressive tools to extract data from disparate sources arguably give it a competitive advantage.

5. It got a little cheaper

At $ 28 a share, Palantir is valued at around $ 52.3 billion, or 28 times next year’s sales. That’s still a high price-to-sales ratio for a company aiming to generate around 30% sales growth next year.

But Palantir could also bag his advice. Last September, it forecasted 42% sales growth for 2020, but it actually exceeded that estimate by five percentage points. If it raises its forecast for the full year over the next few quarters, its stock could actually be even cheaper relative to its sales.

Palantir won’t be seen as a bargain anytime soon, but it appears to have cooled off after hitting its Reddit-fueled high of $ 45 in late January. Investors should expect another potential drop at the end of its lock-in period, but that drop could be a great opportunity for investors who missed Palantir’s initial rally.