To The Moon

$Palantir Technologies Inc.(PLTR)$

Investment Research

In the first part of this investment research for Palantir Technologies Inc. (PLTR), I have explored the qualitative aspects of its business model, strategy, economic moat, product offerings, real business case examples, and applications of its three platforms.

In the second part of my research, I dive into the company's leadership, culture, risk assessment with particular emphasis on the Stock-based compensation (SBC) and a detailed company valuation through the application of a Discounted Cash Flow (DCF) model.

It is evident that the stock hype is over, and PLTR has plunged since its direct public offering (DPO) in September of 2020 and from all-time-high levels. Nevertheless, a performance benchmarking approach suggests outperformance compared to ARK Innovation ETF (ARKK), but not too far away from the SPDR S&P 500 Trust ETF (SPY). Undoubtedly, a prolonged pullback of PLTR offers long-term investors the opportunity to load up shares at undervalued prices, contributing to higher long-term returns.

I generally avoid investments in companies that have recently gone public, i.e., IPO/DPO, due to the elevated price caused by the hype and lack of historical information and visibility. Moreover, from the DPO date and onwards, the stock fluctuates rapidly with high volatility caused by the market participants fighting to determine a fair value for the stock. In addition, the expiration of the lock-up periods provides an exit point for earlier investors, which further suppresses the stock price in the short term. In the meantime, I consider this period a 'knowledge' phase to familiarize myself with the company while being patient until the hype fades away and insider selling reaches a more normalized and sustainable level.

Despite the high pressure on growth stocks in anticipation of interest rates hikes, the global geopolitical tensions are further dragging down prices and have put on sale some of the best growth names that I have been researching for a while. As a result, sky-high valuations of high-growth stocks are now trading at more reasonable levels, and eventually, some qualify for investment. Palantir is one of them, and it is already part of my long-term concentrated portfolio with at least a four to six-year investment horizon.

Customer Acquisition

Additionally, Palantir's top 3 customers accounted for 18% of total revenue in 2021, but this was meaningfully improved from 25% in 2020. As long as the company diversifies its customers with expanding contracts, it is reasonable to expect revenue concentration to fall under 10% in the next two to three years. Investors need to keep an eye on revenue, AR, and industries concentration levels which might distort the company's financials and make the company overreliant on a few. Nevertheless, as the customer base grows, the company gains greater flexibility and mitigates the concentration risk.

As a result of the Government contracts and concentration, this also extends to the political risk for the company. On the positive side, the geopolitical tensions and the Ukraine-Russia war will encourage the US and Western countries and governments to expand their budgets on their national security, deploying more advanced intelligence tools for their national defense. The North Atlantic Treaty Organization (NATO) has already launched a $1 billion fund for AI strategy, and Palantir can leverage its connections to broaden its clientele in the West.

Rating Upgrades

On Monday, March 7th, Palantir stock received a rating upgrade from Morgan Stanley analyst Keith Weiss. Weiss boosted his rating on the stock to “equal weight” up from “underweight.” He assigned PLTR a $16 price target, which suggests a 37% upside based on the current share price of $11.65.

Weiss points out that Palantir's valuation has reached its lowest level since the company went public in 2020, and he sees an opportunity to buy the dip. He also stated that the potential slowdown of its commercial business and its unsustainable operating margin both seem to be priced into the current value of its shares, meaning further downside could be limited.

Investors cheered the upgrade, and PTRL shares rose about 6% during their Monday trading session.

More good news quickly followed. On March 8, Piper Sandler analyst Weston Twigginitiatedhis coverage of Palantir, assigning the company an “overweight” rating and a $15 price target - that implies an upside of 28% based on the current share price. Twigg says that the Russian invasion of Ukraine may accelerate the adoption of Palantir cyber products, which is of course bullish news for the stock.

Furthermore, Twigg believes that the company should beat its annual revenue growth guidance of 30% by 2025 - he says the company’s ecosystem offers powerful IT solutions and sees strong demand from large institutions ahead.

Palantir shares rose more than 9% following Piper Sandler's “buy” recommendation.

Wedbush analyst Dan Ives also sees Palantir as a near-term beneficiary of federal cyber security sector tailwinds, which have been spurred by Russia’s invasion and the accompanying threat of increased cyber attacks.

Conclusion

Palantir remains relatively disconnected from Silicon Valley's and Wall Street's external influences, which allows the company to remain focused on its core principles and strategy. Palantir's mission is to rewrite the rules through hyper growth and as the company gets bigger and becomes more powerful, it will shape the industries and societies of tomorrow.

As Palantir operates in a radically changing environment, I aim to revisit my models periodically when new material information comes to light. Finally, fixating on PLTR's short price movements can easily distract investors from losing sight of the bigger picture, and the current bear market is a unique opportunity for long-term investors to load up shares with a wide margin of safety.