Stock Market

Palantir Is A Growth Company With A Stock Compensation Problem

Palantir (NYSE:PLTR) is a fast-growing government contractor that provides big data analytics platforms to government (and commercial) clients. It offers two software platforms: Gotham, which provides defense and intelligence analysis software, and Foundry, a cloud-native SaaS central operating system for data for commercial users. PLTR stock has had a strange range of prices since going public.

The Palantir (PLTR) logo on a grey wall.

Source: Michael Vi / Shutterstock.com

Morningstar provides a more detailed company description:

“Palantir Technologies provides organizations with solutions to manage large disparate data sets in an attempt to gain insight and drive operational outcomes. Founded in 2003, Palantir released its Gotham software platform in 2008, which focuses on the government intelligence and defense sectors. Palantir expanded into various commercial markets with its Foundry software platform in 2016 with the intent of becoming the data operating system for companies and industries. The Denver, Colorado company had 125 customers as of its IPO and roughly splits its revenue between commercial and government customers.”

Named after the seeing stones in J.R.R. Tolkien’s fantasy novel The Lord of the Rings, Palantir went public in September 2020 at $10 per share and hit a high of $39 in January 2021 before retreating back to todays price of $21.70.

Commercial business growth is a key factor

PLTR’s government related revenues are growing in the 60%-70% range while the commercial business has been growing in the 20% range. There is a great opportunity in the commercial space where Palantir can organize data hidden in legacy enterprise systems at large corporations.

If the company can modify their technology and services to fit a broader range of customers and industries, these high revenue growth rates may be sustainable.

PLTR Stock Financials

PLTR stock is definitely in a high growth mode that attracts many growth-style thematic investors. Since 2018 revenues have almost doubled from $595 million to $1.1 billion in 2020. Analyst revenues estimates for 2021 are approximately $1.5 billion.

Operating cash flow unfortunately is going in the opposite direction. 2018 operating cash flow was ($39.0), ($165 million) in 2019, and ($297 million) in 2020. GAAP profitability is many years away due to the massive amount of stock compensation expensed. Stock comp totaled $1.2 billion in 2020 and is expected to be in the $700-$900 million range for the next several years. COO Shyam Sankar said, “…we plan to continue granting equity to our employees and providing them opportunities to share a meaningful upside in the company.”

Most analysts exclude stock comp to create a pro-forma net income or earnings per share, but stock comp is a real expense that shouldn’t be ignored. As Warren Buffet famously said:

“If compensation isn’t an expense, what is it? And, if real and recurring expenses don’t belong in the calculation of earnings, where in the world do they belong?”

It’s wonderful that the company is so generous to its employees in terms of stock compensation, but it’s not free. This compensation doesn’t come from the CEO, it comes from shareholders and they may not continue to be on board with this ongoing dilution to their PLTR holding.

Conclusion

Themes are great. Growth is great. But investing is about the long-term. And investors require a return on their capital above their cost of capital. The lack of near-to-mid term profitability, the massive ongoing share dilution, and increasing competition make PLTR stock very difficult to invest in now.

A price-to-sales ratio of almost 30x does not make it attractive at this time. Patience will be required for a safer entry point at much lower prices than today.

On the date of publication, Tom Kerr did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Tom Kerr has worked in the financial services industry for over 25 years. Currently he is a Senior Portfolio Manager at Rocky Peak Capital Management. Prior to that he was Chief Investment Officer and Director of Research of SGL Investment Advisors, and has served in a number of positions at other finance-related organizations. Mr. Kerr has also been a contributing writer to TheStreet.comRagingBull.com and InvestorPlace.com. He’s a CFA charterholder and obtained a B.B.A in Finance from Texas Tech University. 

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