Palantir Technologies (NYSE:PLTR) taken Reddit by storm last year. Palantir launched its direct listing in late 2020 with its shares priced at around $9 each. However, investors associated with WallStreetBets pushed the price of PLTR shares to $35.
That was an incredible valuation, well north of $60 billion, for the secret artificial intelligence (AI) company. Since then, cool heads have prevailed and Palantir shares have returned to a much more reasonable price. Even so, the PLTR stock is not a slam-dunk buy. Here are the catalysts that have boosted Palantir’s recent growth and outlook following its disappointing earnings report yesterday.
Palantir Core Value Proposition
Originally, Palantir focused on security and counterterrorism functions. The company has built a reputation as an artificial intelligence provider for spy agencies and the Department of Defense. It grew rapidly in the aftermath of 9/11 as intelligence agencies ramped up their cybersecurity capabilities in an effort to prevent further such atrocities. And Palantir still benefits to some degree from Washington’s focus on cybersecurity.
However, the company is so much more than that now, as Palantir has used its crime-fighting abilities to pivot to fighting fraud and money laundering in the banking system. Then he started working for commercial companies as well.
Today, Palantir seeks to help companies across a wide range of industries analyze complex data. Palantir is not just a data mining company; this helps human analysts in general. Specifically, if people are working on a certain problem, Palantir can sort through millions of columns of data and identify patterns and trends that a human analyst might want to investigate.
Palantir recently put its platform to work for the healthcare industry as it improved government responses to Covid-19. The company’s ability to sift through tons of data and highlight interesting patterns is invaluable. Subsequently, physicians and biologists can further analyze and investigate Palantir’s findings.
In other words, the company has an interesting hybrid model that combines AI with human expertise. This contrasts sharply with, for example, from IBM (NYSE:IBM) Watson AI System, which relies almost entirely on machine learning. Although Watson is good at winning chess matches and game shows, it has so far been less effective as a tool for business than Palantir’s model.
Palantir faces more competition in the private sector
Palantir has established a strong niche in supporting governments’ defense, intelligence and crime fighting efforts. However, Palantir now also helps companies in various fields, such as healthcare and supply chain management.
In these areas, Palantir faces more intense competition from other companies that have enhanced their AI capabilities to solve these problems. Investors should not expect Palantir’s private sector business to grow as quickly as its government operations.
Plus, Palantir doesn’t quite have the defense business either. For example, C3.ai (NYSE:AI) recently announced a $500 million contract with the Department of Defense, validating the company’s expansion from its core market of industrial AI into other areas, such as security. Despite this huge contract, AI stock is down around 85% from its 52-week highs, and its balance sheet cash is now equal to 40% of its market capitalization. And that brings me to the next point.
Palantir rating remains a major issue
Palantir shares are certainly not as expensive as they were a few months ago. Yet, now trading around $12, Palantir has a market capitalization of over $24 billion. Don’t let the low stock price fool you; the valuation of the PLTR stock is still high.
The company’s 2021 revenue was around $2 billion, meaning shares change hands for 12 times its 2021 sales. equity basis, the company has achieved positive profitability and cash flow status.
But Palantir is not very profitable, even with these exclusions. In particular, its fourth-quarter adjusted earnings per share of 2 cents was well below analysts’ average outlook. And the company’s forecasts weren’t very impressive either. Investors are therefore paying a fairly high price for Palantir even now, especially compared to its most beaten rivals in the software-as-a-service space.
The verdict on PLTR shares
Some traders hoped Palantir’s fourth-quarter earnings would be a turning point for it. However, it appears that will not be the case as its shares fell more than 15% yesterday following its results.
Palantir continues to show solid revenue growth, but it will need to improve its profitability and cash flow to really attract long-term investors to the name.
Palantir is still trading at a high valuation, likely due to its ties to intelligence agencies and its former stock meme status. However, given the fall of other AI stocks like C3.ai, it’s hard to justify Palantir’s current price-to-sales ratio.
As of press date, Ian Bezek held long positions in AI and IBM shares. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.
Ian Bezek has written over 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a junior analyst for Kerrisdale Capital, a major New York-based hedge fund. You can reach him on Twitter at @irbezek.