Why Palantir Stock Declined 13.5% This Week, Even as the Market Soared

What happened

Shares of big data analytics company Palantir Technologies (PLTR 3.50%) fell some 13.5% this week, according to data provided by S&P Global Market Intelligence, despite the broader markets finishing the positive week much higher.

As is usually the case with widely divergent results, the shortfall came on the heels of the company's earnings release on Monday, Aug. 8. Results and guidance underwhelmed, and the negative momentum appeared to outweigh otherwise positive market sentiment.

So what

For the quarter ended June 30, Palantir reported 26% revenue growth to $473 million, with adjusted losses per share of $0.01. The revenue figure slightly beat analyst expectations, but the bottom line was a miss.

As is usually the case with earnings releases, investors tend to react more to the guidance than the reported numbers. This is where the worries came in, with management projecting $474 million to $475 million in revenue next quarter, versus expectations of $505.6 million. For the year, management revised down guidance to $1.9 billion to $1.902 billion in revenue, versus consensus estimates of $1.98 billion.

On the conference call with analysts, CEO Alex Karp noted that the U.S. government was pushing out some large contracts, which explains the downward revision in guidance for the third quarter as well as the rest of the year.

While Palantir makes crucial wartime software for the government, it also makes commercial software for large businesses. That commercial segment fared much better, growing 46% to $210 million in the quarter, making up 44.4% of total revenue. Businesses appear to be adopting the company's software at an accelerating rate, with the customer count growing from 34 to 119 over the past year alone. 

Now what

While the pace of large government contracts can be lumpy, it's possible investors are being too pessimistic, given the strength and adoption on the commercial side of the business. If the commercial business eventually grows to exceed the size of the government section, Palantir could see accelerating revenue growth, or it could at least maintain high growth for some time to come.

Yet as is the case with most high-growth software companies, profitability remains a question. Palantir reported positive free cash flow, but it has negative earnings due to very high stock-based compensation, which is a real cost to shareholders. Meanwhile, the stock still trades at more than 11 times sales, which isn't exactly cheap, especially if interest rates stay higher for longer.

Still, Palantir is a very intriguing company. It clearly has some great technology adopted by many U.S. defense organizations for mission-critical applications, and commercial customers appear to be seeing the value in its offerings as well. It's a name to have on a watch list, though it's still a bit pricey. Younger, more aggressive investors might find the stock an appropriate choice, while more conservative investors may want to wait for a better price.