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Why Palantir Technologies Stock Dropped in February

By Lou Whiteman - Mar 2, 2021 at 10:43AM

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Quarterly earnings caused investors to reassess the data analytics specialist's valuation.

What happened

Shares of Palantir Technologies (PLTR -4.19%) fell 32.1% in February, according to data provided by S&P Global Market Intelligence, and fell nearly 40% from its midmonth highs. The stock has been under pressure since Palantir's earnings report, but is still up big during the company's brief time on public markets.

PLTR Chart

PLTR data by YCharts

So what

Data analytics specialist Palantir has been a popular stock since going public in late September, up more than 160% even after a rough February. Investors are excited about the potential of its AI-fueled analytics software, which among other things is credited for helping United States intelligence agencies find Osama bin Laden.

But that excitement got tempered by a dose of reality when Palantir released its first quarterly earnings report as a public company midmonth. Revenue was up 47% in 2020 compared to 2019, but Palantir only expects sales growth of "greater than 30%" in 2021. The company had a little more than $1 billion in revenue in 2020 and is targeting $4 billion in sales by 2025.

Illustration of a secure cloud.

Image source: Getty Images.

That's pretty ambitious, but Palantir was priced for perfection heading into the quarterly report, and the results were not enough to sate investor expectations. The stock also likely came under pressure because the release of earnings means a lot of shares held by insiders that were locked prior to the release became available to be sold, meaning we could have a flood of additional shares hitting the market in the weeks and months to come.

Now what

There is little argument concerning the potential of Palantir's technology. The argument is over valuation. Palantir trades for more than 40 times sales. That's frothy for a government contractor and elevated for a commercial software specialist.

Palantir is both, but it's worth noting that in the most recent quarter, government customers accounted for nearly 60% of total revenue, and the government portion of the business grew faster than the commercial portion. The company has announced new partnerships aimed at boosting that commercial portion, but those are in the early stages, and working with partners could reduce the profitability of new commercial clients brought in through the arrangement.

Nothing is wrong with Palantir the business, but investors in February began to reconsider Palantir the stock. Given its valuation, don't be surprised if there is more volatility in the months ahead.

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