Palantir's (NYSE:PLTR) stock recently plunged after the data analytics firm posted mixed fourth-quarter numbers. Its revenue rose 40% year over year to $322.1 million, beating estimates by $21 million. But its net loss only narrowed slightly from $159.3 million to $148.3 million, or $0.08 per share, which missed the projected profit of $0.02 per share. Its forecast for "greater than 30%" revenue growth in 2021 met expectations for 31% growth, but investors seemed to expect even higher numbers.

Those two red flags -- along with Palantir's high valuation and its upcoming lock-up expiration -- likely sparked the sell-off following the stock's meteoric rise over the past four months. Investors who missed those gains, however, should consider buying this dip for five simple reasons.

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1. Mind the stock-based compensation

Like many high-growth tech companies, Palantir subsidizes its employees' salaries with stock bonuses to conserve its cash. As a result, its stock-based compensation more than tripled year over year to $241.8 million during the fourth quarter and consumed 75% of its revenue.

Stock-based compensation often remains elevated after a company's public debut, even if it's a direct listing like Palantir's rather than a traditional IPO, because insiders still want to cash out their options. But that compensation ratio usually declines significantly as a company matures.

If we back out those expenses, the associated payroll taxes, and direct listing costs from both quarters, Palantir would have posted an operating profit of $104.1 million, compared to a loss of $70.1 million a year ago. In other words, Palantir's earnings miss wasn't as bad as it seemed, and its profitability could improve as it reins in its initial costs.

2. Rising margins

Palantir's adjusted gross margin, contribution margin (which excludes sales and marketing costs and stock-based compensation), and operating margin all expanded in the fourth quarter and for the full year.

Period

Q4 2019

Q4 2020

FY 2019

FY 2020

Gross Margin

72%

84%

71%

81%

Contribution Margin

33%

62%

21%

54%

Operating Margin

(31%)

32%

(45%)

17%

Non-GAAP. Data source: Palantir Q4 presentation.

Those rising numbers indicate Palantir still has plenty of pricing power and a viable path toward generating stable long-term profits.

3. Rising revenue per customer

In the fourth quarter, Palantir signed 21 contracts worth $5 million or more, including 12 contracts worth $10 million or more. Its major wins included deals with Rio Tinto, PG&E, BP, the U.S. Army, the U.S. Air Force, the FDA, and the NHS. It also secured a major contract with IBM in the current quarter.

Palantir's average revenue per customer rose 41% to $7.9 million for the full year. Its average revenue from its top 20 customers also increased 34% to $33.2 million. That expansion indicates Palantir's "acquire, expand, and scale" model -- in which it secures a customer with one service to cross-sell additional ones over the long term -- is paying off.

For example, the U.S. Army, which already uses Palantir's government-facing Gotham platform to plan missions, signed a new AI contract, renewed an analytics partnership, and signed a new contract to modernize its ground stations with Palantir over the past year alone.

The FDA and other agencies are also strengthening their ties to Palantir, which will likely help it achieve its long-term goal of providing the "default operating system for data across the U.S. government."

4. Shooting down two bearish arguments

For the full year, Palantir's government revenue rose 77% to $610 million and accounted for 56% of its top line. That growth counters the bearish notion that its government business is running out of room to grow.

Meanwhile, Palantir's commercial revenue, which mainly comes from its enterprise-facing platform Foundry, grew 22% to $482 million. Within that total, its commercial revenue in the U.S. more than doubled. That growth counters the bearish claim that Palantir will struggle to grow its commercial business to reduce its dependence on government contracts.

Palantir still faces indirect competition from other data-crunching companies like Alteryx (NYSE:AYX) and Salesforce (NYSE:CRM), but Palantir's government-hardened reputation and aggressive tools for pulling data from disparate sources are arguably giving it a competitive edge.

5. It's gotten slightly cheaper

At $28 per share, Palantir is valued at about $52.3 billion, or 28 times next year's sales. That's still a high price-to-sales ratio for a company that aims to generate about 30% sales growth next year.

But Palantir could also be sandbagging its guidance. Last September, it forecast 42% sales growth for 2020, but it actually topped that estimate by five percentage points. If it raises its full-year forecast over the next few quarters, its stock could actually be even cheaper relative to its sales.

Palantir won't be considered a bargain anytime soon, but it seems to have cooled off after hitting its Reddit-fueled high of $45 in late January. Investors should expect another potential decline as its lock-up period ends, but this dip could be a great opportunity for investors who missed Palantir's initial rally.

 
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.