The stock of Palantir Techologies (PLTR) has been on some crazy ride since the provider of data analytics software came public in September 2020. It opened around $10 and in a few months soared to a high close to $50. More recently, the shares are back around $10 after its fourth-quarter results knocked the stock to a 52-week low. The headline growth numbers looked solid, with revenue up 34%. Are the shares worth buying at this depressed price? A look under the surface leaves me treading far away as the stock looks like one to avoid.
An old trick that some corporations have pulled on Wall Street is to fund small companies that in turn buy the investing company's products. The method will supercharge revenue growth on the surface, but when one digs deeper the company has merely turned "strategic investing" into revenue. This is the case with Palantir's corporate growth strategy, and Wall Street is no longer buying into the scheme.
Over the past year, Palantir has implemented a strategy to diversify sales away from government customers, its primary revenue source. Palantir aggressively has invested in the PIPEs (private investment in public equity) of SPAC deal target companies while simultaneously signing software contracts. Perhaps Palantir management envisioned a virtuous circle: Invest cheaply as companies de-SPAC; sell software to these emerging growth companies with newfound windfalls of SPAC capital; earn cash flow to invest in more SPAC deals; then, finally, Wall Street applauds growth with a top-dollar valuation. Instead, Palantir is losing investment dollars while Wall Street discounts this incestuously earned revenue and finds far less growth under the hood.
How would Palantir's growth look without this SPAC revenue? Once the corporate selling SPAC strategy is stripped out, Palantir's overall revenue grew 26% year over year instead of the 34% reported. Reported bookings fell 6% year over year but declined 31% without the attribution of strategic investment booking. A remarkable 27% of bookings were the result of SPAC deals.
It can be argued that these "strategic investments" in SPACs have come at a high cost, considering the sizable valuation decline of the stakes in these companies. Of course, the value may increase over time, but Wall Street still perceives this as a questionable corporate strategy to drum up sales.
Another issue is the deceleration of government-generated revenue. RBC noted, "We continue to believe government is the stronger part of Palantir's business and a slowdown is a worry, especially since we believe Palantir received meaningful one-time COVID-related business during the pandemic." Likewise, Morgan Stanley commented, "The new cohort analysis presented by the company suggests Palantir added just $8 million in new government revenues in 2021, down from $77 million in 2020, and add zero net new government customers (still at 90)."
In the 15 months since Palantir listed on the New York Stock Exchange, fully diluted shares have increased from 2.17 billion to 2.324 billion, a rise of 7%, as stock-based compensation significantly added to shares outstanding.
Even after the recent stock decline, down 40% this year, Palantir still carries a premium multiple, trading at 12x 2023 sales. The software company plans to increase its sales force, potentially further lowering margins after a disappointing quarter.
Palantir's strategic investments, meant to increase non-government revenue, are a questionable and costly experiment. The stock lacks valuation support while business momentum slows, leaving room for Palantir's shares to fall further. Investors would be wise to stay on the sidelines.
