If you’re a Palantir (NYSE:PLTR) shareholder who bought in anytime in 2021, you’ll most likely be holding on to a very very red position right now. Palantir has indeed been trending down along with all other high-multiple growth stocks but other less talked about fears seem to have resurfaced as well.
To most, the Palantir story has indeed come to an end and I daresay that it is probably the most hated stock on the market at the moment. What exactly is going on and will Palantir eventually reach its fair value of $5?
Let us look at 4 reasons why this company is seeing so much weakness at present.
1) Missed Earnings
Palantir missed several targets at their latest earnings call, with the greatest letdown being their final adjusted EPS of $0.02 which is far less than the expected $0.04.
While everything else appeared rosy for the company, investors were quick to notice that Palantir’s government revenue has been decreasing drastically year over year.
Although their government revenue is still increasing, albeit at a slower rate, Palantir had been trading at high multiples previously as shareholders were confident that they could sustain their early stage growth rate. But, their latest earnings call suggests otherwise and shareholders want more for the premium that they are paying.
One area that many seem to neglect in this chaos is that the business is on a healthy path to profitability. Palantir has managed to reduce the losses in their operating margin from $156 million back in Q4 2020 to about $59 million in Q4 2021. This shows that Palantir may eventually become profitable in the near future as they close the gap in losses from operations.
2) Analyst Downgrades
Banks and analysts were quick to downgrade Palantir based on the results of their earning call. The following downgrades were made last week by:
- Jefferies Financial Group – Reduce from $31 to $24
- Royal Bank of Canada – Reduce from $15 to $9
- Deutsche Bank Aktiengesellschaft – Reduce from $18 to $15
For most seasoned investors, analyst downgrades/upgrades are mere noise. That said, while most investors are becoming resilient to market calls, they do impact a company’s share price in the short term.
3) Insiders Selling Off
Stock-Based Compensation (SBC) has lead to controversy surrounding Palantir. In its simplest form, SBC is where instead of paying employees’ salaries in cash, the company would pay them a combination of say, 75% in cash and 25% in stock.
There are a few reasons why Palantir offers SBC; they want to attract the best talent and since they lack the monetary resources to do so, they had to compensate employees with stock.
While there are many advantages to SBC, it usually hurts investors as the company needs to issue more new stocks which would dilute the ownership of existing shareholders. In addition, SBC also encourages a high degree of insider selling. For example, if an employee were to receive 25% of their salary in stock, they may need to sell their stock in order to pay their bills.
The diagram below shows that insider selling has been heavy at Palantir. It is fortunate that such information is made public due to regulations from the government. If you scroll down the rest of the list here, you can see that not a single insider has bought and all they have been doing is sell, sell, sell. I can’t seem to find a positive angle for insider selling so for readers who think otherwise, do share your thoughts in the comments below.
4) Institutions are dumping
Investors see institutional ownership as a good thing as institutions usually buy into companies which have potential in the long haul. Unfortunately, less than 35% of Palantir shares are held by institutions which is a signal that this company isn’t one that shareholders hold on to for long.
In addition to this, we do have institutions dumping right up till market close on Friday. ARK offloaded pretty much all their Palantir shares in their respective portfolios. While the “copy ARK trades” cult following has most certainly lost all momentum in recent time, I must say that the loss of ARK as a Palantir bull is something that will add a lot of weakness to the stock in the near term.
Is there any hope for the company?
The future does look bleak for the company. On top of the points which I mentioned above, we have looming macroeconomic factors such as the increase in interest rates. If we go deeper into the fundamentals of Palantir, even their Net Revenue Retention rate seems questionable when compared against other high multiple software companies such as Snowflake. At this point, there is nothing stopping the continuation of this bear trend.
At best, we might see some relief should the company reach profitability in which case the tides may turn but that still seems like a longshot.
For now, Palantir stockholders like myself a left with are bag but let’s always remember that “We’re in this for the long haul”.
