Multiple Red Flags Are Flying Around Palantir Stock

After Palantir (NYSE:PLTR) reported another quarterly loss on Feb. 16, I remain quite skeptical about the company’s medium-term outlook and its profitability. As a result, I continue to urge investors to sell PLTR stock.

Palantir reported a fourth-quarter earnings per share loss of 8 cents, versus analysts’ average estimate of a loss per share of 14 cents. But there appeared to be no information in the company’s press release or its earnings conference call to alleviate my fear that the data-analysis company could be poised to lose a great deal of business from the U.S. government this year.

Indeed, the apparent omission of any reassurance by the firm on that front, along with its relatively conservative 2021 revenue guidance, has left me more concerned about that issue.

Meanwhile, I’m worried that Palantir could be using a huge amount of stock-based compensation to de-emphasize its lack of profitability, its likely huge customer-acquisition costs, and potentially its relatively low prices that it’s charging its new commercial customers.

The Government Business Could Weaken

In the past, I’ve warned that the Biden administration could de-emphasize data analysis in favor of other priorities. I’ve also pointed out that because Peter Thiel, a Republican, was a co-founder of and big investor in Palantir, while the company has historically been antagonistic to big tech, the new administration could give Palantir the proverbial cold shoulder.

As I noted earlier, I’m more concerned about that issue following the company’s Q4 earnings report. On at least two occasions during the earnings conference call, Palantir executives said that the company’s U.S. commercial business was exhibiting “strong momentum.” I was not able, however, to find any examples of them using the same or similar language to describe the company’s U.S. government business.

Uncertainty about the outlook of the government business could also partially explain Palantir’s relatively conservative 2021 revenue guidance. Specifically, after its top line jumped 47% in 2020, the company would only predict year-over-year top-line growth of more than 30% for 2021.

If the company’s sales climb 35% or less this year, that would represent a huge deceleration of revenue growth. One big factor behind such a potential deceleration could be reduced momentum for Palantir in Washington.

Low Profitability, Low Margins and High Customer-Acquisition Costs

Even though Palantir’s revenue jumped 47% on a year-over-year basis last quarter, its net loss, including nearly $242 million of stock-based compensation, only fell 7% to $159 million. Meanwhile, the company’s sales and marketing costs, including stock-based compensation (SBC), soared close to 3.5x, jumping from nearly $23 million to almost $76 million.

The disparity between Palantir’s top-line growth and its bottom-line rebound, along with the huge jump in its sales and marketing spending, leads me to believe that its customer acquisition costs, including SBC, are soaring.

Meanwhile, the company appears to be using its SBC to deemphasize the impact of the latter situation on its margins. When referencing margins in its press release and conference call, Palantir appeared to exclude SBC from the data. I believe that, if the SBC was included in the margin data, all of the margins would be negative.

Palantir’s apparent reliance on SBC to pay for the huge increase in its costs is likely to badly hurt the owners of PLTR stock when the company’s lockup expiration period was to end on Feb. 18.

Weak Commercial Growth

Another factor behind Palantir’s low profitability may be that it’s charging its new commercial customers relatively low prices. The company reported that it had recruited multiple new, large commercial customers in Q4, including mining giant Rio Tinto (NYSE:RIO) and a huge utility, PG&E (NYSE:PCG), while intensifying its existing work with oil giant BP (NYSE:BP) and an unnamed client described as a “Fortune 200 industrials manufacturing customer.”

Yet Palantir reported that its Q4 commercial revenue had only inched up 4% last quarter. Assuming that Palantir did not lose a meaningful number of commercial customers between the fourth quarter of 2020 and the fourth quarter of 2019, the only explanation for the combination of the company’s small revenue gain and its signing of large, new deals appears to be that it is charging its new customers very low prices.

The Bottom Line on PLTR Stock

Based on Palantir’s Q4 results and the comments by its management team, I continue to believe that the company’s U.S. government business could meaningfully weaken this year. Moreover, I think that the company’s customer-acquisition costs are surging, causing its actual margins to be quite weak, while it’s using low prices to attract new commercial business.

Meanwhile, PLTR stock is still trading at a very high price-sales ratio of 35x and its lockup expiration is at hand, making the shares very unattractive.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Larry 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. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.