Palantir Technologies Inc. ( NYSE:PLTR ) has recently become a favorite stock on Reddit’s WallStreetBets board. The stock is apparently now being purchased by hedge funds too. As an investor you may be wondering if you are missing out and whether you should also be buying the stock. Before you do, it’s important to consider your time horizon.
WallStreetBets is followed by momentum traders who tend to have fairly short time horizons. Hedge funds may have slightly longer time horizons, but they are usually a lot shorter than those of a ‘long term investor.’ If you plan to invest in Palantir for the long run, and do so when everyone else is buying, there’s a chance you’ll be overpaying.
Of course, if you really believe the stock is undervalued that doesn't matter. This is why it’s important to have a solid investment thesis rather than chasing popular stocks. You can also look at analyst forecasts to get an idea of what the future may hold for the stock.
Palantir Technologies Inc. builds and deploys software platforms for the intelligence community in the United States to assist in counterterrorism investigations and operations. With the latest financial year loss of US$1.2b and a trailing-twelve-month loss of US$1.2b, the US$42b market-cap company amplified its loss by moving further away from its breakeven target. Many investors are wondering about the rate at which Palantir Technologies will turn a profit, with the big question being when will the company break even? We've put together a brief outline of industry analyst expectations for the company, its year of breakeven and its implied growth rate.
According to the 9 industry analysts covering Palantir Technologies, the consensus is that breakeven is near.They expect the company to post a final loss in 2021, before turning a profit of US$37m in 2022. However, as you can see from the chart below, the profit will be quite modest compared to the large losses the company is incurring today. Furthermore, the company is expected to slip back into negative territory in 2024. Even the most optimistic estimates are quite modest relative to the current losses.
When you drill down into the numbers, there appears to be a lot of downside risk. When Palantir breaks even it is only expected to earn $37 million in net income, compared to the current loss of $1.2 billion. And, to get there, revenue growth will need to accelerate to 29% a year, compared to the 12.5% growth it’s achieved over the last six years. In other words, the company needs to perform very well just to break even! You can view the data in more detail here.
On the face of it Palantir may not look like a great investment, but there is actually a good bull thesis too. Data and data analysis are becoming increasingly important to governments and large institutions, and these entities are struggling to keep up with the technology required to manage and analyze data. Palantir is ideally positioned to fill this gap with its platforms.
In addition, the company has managed its capital prudently, with debt making up 11% of equity. This means that it has predominantly funded its operations from equity capital, and its low debt obligation reduces the risk around investing in the loss-making company.
The Bottom Line
Buying a stock because other people are buying it often turns out to be a bad idea, especially for long term investors. When you invest in a company it’s always a good idea to have a clear reason for doing so, and also to be aware of the downside risk. If you buy Palantir as a long-term investment, you are making the call that revenue growth will accelerate in the next few years. Whether this happens or not remains to be seen, so you may want to wait for more evidence, or do more research.
At some point the momentum investors will probably sell the stock, which may also create a better buying opportunity.
You can track the company’s outlook and financial position on the Palantir Technologies' company page on Simply Wall St . You might also want to read the step by step fair value calculation for Palantir we published in June.
Simply Wall St analyst Richard Bowman and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.