Palantir (PLTR 3.73%) became famous about 11 years ago for helping the CIA find Osama bin Laden. Since its IPO in September 2020, investors have closely watched the company co-founded by the billionaire entrepreneur and venture capitalist Peter Thiel.
The stock price action of Palantir since its IPO has attracted both promoters and detractors. Investors see several reasons for optimism and opportunity in what Palantir offers, but there is at least one critical factor that may deter potential investors. The decision for investors is whether the reason to sell or avoid Palantir stock outweighs the reasons to buy. Let's take a look at three of those reasons.
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1. Reason to buy: Competitive advantage
Investors can understandably become confused amid the choices of data science companies. Nonetheless, Palantir is not a competitor of Snowflake (SNOW 3.69%), Alteryx, or other data science companies.
Palantir stands out by analyzing and proposing possible artificial intelligence (AI)-driven decision scenarios based on data gathered from diverse sources. It started in the government realm, where its Gotham software has helped both the U.S. military and law enforcement agencies maintain peace and order.
It later added the Foundry segment to bring this technology to the commercial sector. It has become the fastest-growing part of the company as that customer count grew 46% quarter over quarter in the third quarter (ending Sept. 30, 2021). Clients have applied this technology to issues as diverse as cancer research, global supply chains, and fighting against money laundering.
2. Reason to buy: Revenue growth
The big data industry has generally benefited from rapid growth. According to Valuates, the industry, valued at $198 billion globally in 2020, will reach an estimated size of $684 billion by 2030, a compound annual growth rate of 14%.
Palantir seems to have far exceeded that growth rate. For the first three quarters of 2021, the company reported revenue of just over $1.1 billion. This amounts to a 44% increase compared with the first nine months in 2020.
Palantir predicts 40% revenue growth for fiscal 2021, while analysts believe that will slow to around 30% in 2022. Nonetheless, revenue growth should remain strong as both governments and companies seek help solving problems and averting crises.
3. Reason to buy: A discounted stock price
The stock price has become increasingly attractive for prospective stockholders looking for an opportunity. Since peaking at $45 per share almost one year ago, Palantir's stock price has steadily dropped. It now sells at a discount of more than 60% from that price, its lowest price since the stock began to take off in late 2020.
PLTR data by YCharts
Palantir now trades at a price-to-sales (P/S) ratio of about 22, down from the sales multiple of 46 as its peak nearly one year ago. This also makes it much cheaper than Snowflake, which sells for 88 times sales.
Reason to sell: Product secrecy
Admittedly, even bullish investors may struggle with a secrecy issue regarding the company's products. Due to the sensitivity of Palantir's work, the company cannot share many of its capabilities publicly, particularly with its Gotham software package. This leaves investors unable to evaluate whether the software can do its job or is too good for what companies actually need.
While one can understand the confidentiality, the market dislikes uncertainty. Since most investors cannot know its full capabilities, they might pass on Palantir in favor of a company and competitive advantage they can better understand.
Furthermore, should that competitive advantage change or erode, investors may not have a quick or effective way to discover such a shift. Such a possibility could also sap the stock's potential.
Should investors consider Palantir?
Although the uncertainty factor is a significant negative, the benefits of Palantir appear to outweigh the risks. While the secrecy of Gotham can make it harder to evaluate Palantir, the company offers a unique product with no direct competitors.
Moreover, the massive revenue growth and the discounted stock price lower the risks associated with the secrecy. As more governments and organizations turn to Palantir's insight, the rising revenue could easily take the tech stock higher over time.
