Palantir: The Sell-Off Is Not Over

Since coming public via a direct listing in September, Palantir Technologies (NYSE:PLTR) has been on a wild ride. Consider that PLTR stock has gone from around $10 to a high of $45.

But lately, things have gotten choppy. Consider that PLTR stock is now trading at $23.96, with the market capitalization at $45 billion.

Of course, a major reason for the sell-off has been due to the recent bearishness in the general markets, especially with high-growth tech operators.  It does look like investors are getting nervous about rapidly increasing interest rates.

But general market sentiment is not the only factor impacting PLTR stock. Keep in mind that the latest earnings report was also disconcerting for Wall Street. Now it’s true that – on the surface – the performance looked solid. Revenues jumped by 40% to $322 million, trumping analysts’ prediction of $300.7 million. As for the non-GAAP earnings, they came to six cents a share, compared to the Street estimate of two cents a share.

So then what was the problem with the report? Well, it looks like growth will decelerate. For the full-year, the forecast is for revenues to rise by around 30%.

Now it’s true that the management may be taking a conservative approach. But then again, there are some reasons to be more skeptical about the growth story.

The Business

Founded in 2003, Palantir has built an impressive platform that provides sophisticated AI and machine learning models for customers. Originally, the focus was on top-secret activities, such as for finding terrorists or enemies on the battlefield. There was even buzz that Palantir’s technology assisted in locating Osama bin Laden.

But during the past decade, Palantir has been leveraging its platform into commercial markets. Yet this has proven tougher. After all, the market is highly competitive, with rivals like Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), IBM (NYSE:IBM), C3.ai (NYSE:AI), Accenture (NYSE:ACN) and so on.

And yes, the latest quarter does point out the challenge for Palantir. While government revenues soared by 85% to $190 million, there was only a 4% increase for the commercial segment to $132 million. This is even though the company announced large customers like BP (NYSE:BP), Rio Tinto (NYSE:RIO) and PG&E (NYSE:PCG).

Moreover, being heavily reliant on the government sector has its own problems. According to William Blair analyst Kamil Mielczarek: “While growing at exceptionally strong rates in recent quarters, the Government segment has been heavily supported by U.S. Army contracts won in 2019.”

Another issue with the government sector is that it will likely come under more pressure. Let’s face it, the budget deficits are at high levels. As a result, it will get tougher to justify new expenditures.

The Bottom Line On PLTR Stock

The lockup has expired on PLTR stock, which means that insiders can sell their holdings. And there has been a loading of shares.

The Chief Operating Officer, Shyam Sankar, sold 757,510 shares at prices that ranged from $24.59 to $29 (he netted over $21 million). Then there were the sales of 2.7 million shares from three other executives. They include Stephen Cohen, the cofounder and president; Matthew Long, the general counsel; and Ryan Taylor, the chief legal officer and business affairs officer.

Such activity is not necessarily unusual (after all, equity compensation is a big part of the Silicon Valley way). But it is still a red flag. Whenever a group of executives sell off their shares — especially after a big run-up — this is a sign that the valuation of the stock is on the high side.

And this really should not be a surprise either with PLTR stock, which is trading at 24 times sales. This is definitely a stretch, as the growth rate is likely to come down. Thus, it might be better to temper expectations on this investment for now.

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

Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling.  He is also the author of courses on topics like the Python language and COBOL.