Palantir’s Hype Train: Why It’s Time to Pump the Brakes on PLTR Stock

Stocks to sell

With another earnings season dying down, investors may be reviewing how their given holdings performed over this past quarter. One meme stock that has been on the downtrend in recent weeks after reporting earnings is Palantir Technologies (NYSE:PLTR).

Shares of PLTR stock dropped 5% on August 8 following its Q2 earnings release, and have continued to trend lower since.

The company reported a rather impressive revenue increase of 13% year-over-year to $533 million, alongside an adjusted net profit of $120 million. Earnings per share came in at 5 cents, which met Wall Street’s estimates.

So, what gives? After all, Palantir reported a GAAP net profit of $28 million, marking its third consecutive profitable quarter.

Despite these solid results, it’s clear that some investors wanted to see more out of the big data/intelligence company. Given the stock’s massive run up on a year-to-date basis, it appears much of the enthusiasm heading into Palantir’s earnings was priced in.

With that said, let’s dive into why Palantir may be a stock to forget about for a while, at least until it can show consistent profitability for another five quarters.

Palantir’s Fundamentals

The reason I think investors should wait to see around eight quarters (two years) of consecutive positive GAAP net profits with Palantir is simply the company’s long-term track record of pumping out losses.

Despite massive government contracts, Palantir has shown fundamental issues with its margins and profitability, consistently spending more than it makes. That’s a recipe for long-term value destruction, which is unfortunately what this meme stock has shown.

Perhaps things are changing, and that could certainly be the case. Palantir has continued to show vigorous growth, pumping out top-line revenue growth of 47% in 2020 and 41% in 2021.

However, in 2022, revenue growth slowed to 24%, and the company stopped projecting 30% growth. This deceleration was primarily due to macro headwinds impacting software spending. 

In the latest quarter, Palantir’s revenue was divided, with 57% from government clients and 43% from commercial clients. While the government business showed stability, the commercial segment’s slowdown offset much of the progress.

Palantir expects ongoing pressure throughout the year. Its third-quarter revenue should increase by 16%-17% year-over-year. The company’s full-year outlook predicts at least 16% revenue growth to $2.21 billion.

The company attributes near-term growth to its robust U.S. commercial business and the gradual recovery of its U.S. government business, which faced timing challenges with new contracts in H1 2023.

It’s Mostly Meme Stock Hype

PLTR stock dropped following its Q2 report, with $28M net income and $533M revenue, up 13% year-over-year.

The stock surged from $4.30 to $20 based on hype around the company’s potential to monetize artificial intelligence. While an obvious catalyst for growth reaccelerating, I’m skeptical as to Palantir’s ability to capitalize on this specific secular growth trend. 

A positive call from Wedbush’s Dan Ives boosted the stock 15% in days. While bullish sentiment prevails, the company’s valuation of roughly 16-times sales ought to raise caution, especially for those who take fundamentals seriously.

Parsing out how much of Palantir’s valuation is still hype, versus how much is fundamental long-term cash flow growth, is difficult to do. However, it’s my view that the company’s valuation reflects a considerable amount of hype right now, and in the absence of revenue growth acceleration, this is a stock with significant downside risk from here.

What Now

Palantir showed strength in the first half of this year, and has seen this strength reflected in its stock price. That said, I’m expected to see profit taking and a high hurdle set by the company’s forward looking guidance to likely put a pause on share price growth moving forward.

Until Palantir can prove itself as a true cash flow generating machine for investors, this is a hyped up meme stock that’s worth watching from the sidelines.

On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.