Palantir stock was among the key beneficiaries when the Federal Reserve raised its key policy interest rate by 25 basis points (0.25%). It’s stock price surged more than 26% in seven trading days following the news. Palantir started trading on NYSE in October 2020 when tech stocks enjoyed the pandemic-induced euphoria. During this tech bubble, the stock surged 282% in just four months. Then it corrected 26% and later crashed, wiping away 58% of its valuation.
The above stock price momentum has nothing to do with Palantir’s business or future growth prospects. The stock got swayed in the pandemic-induced tech bubble. After the stock market crash, it has set the course of growing on fundamentals. That is the kind of growth that is long-lasting.
This brings us to the question is Palantir a stock to buy and hold in 2022? First, you have to dive into the fundamentals and look at its future growth prospects.
What is Palantir’s Growth Strategy?
Palantir offers AI-enabled enterprise data platforms. These platforms help governments and organizations devise solutions by cracking complex and sensitive data. Its application spans from helping build safer planes to new drug discovery to identifying supply chain bottlenecks.
Palantir’s Three Platforms:
- Foundry – for commercial business,
- Gotham – for real-time information processing for governments, and
- Apollo – to help run Foundry across various on-premise and cloud networks.
The company is exploring the application of Foundry in cryptocurrency exchanges to help detect money laundering and reduce fraud.
Palantir has come under criticism from Wall Street for its reliance on government contracts. However, the company is expanding its commercial clients where the real profit lies. In 2021, it tripled its commercial customer count to 147 and increased commercial revenue by 34% to US$645 million. At the end of 2021, the commercial business accounted for 42% of its revenue.
In 2021, US commercial net dollar retention was 150%, and government net dollar retention was 146%. This means, it not only retained existing customers but also increased revenue earned from each customer.
Palantir Stock: 2022 Growth Prospects
Palantir is expanding its selling and distribution activity to bring in more commercial customers in 2022. The company expects to achieve 30% revenue growth in 2022, 2023, and 2024 after reporting 41% revenue growth in 2021. Although Palantir doesn’t offer high revenue growth like other early-stage tech companies, it has a retention rate of over 100%. This hints that its selling effort in 2022 could bear fruit over the long term.
Amid the Russia-Ukraine war, the US government could boost the defence and healthcare budget. That could work on a positive note for Palantir as it serves government organizations like the CIA, FBI, and Centers for Disease Control and Prevention (CDC).
Moreover, the war has disrupted the global supply chain. Airlines and ships are working out new routes that avoid Russian air and sea space. Companies are looking for new suppliers. The routing and supply chain re-work calls for data-driven decisions. Palantir is working with Canada-based auto parts leader Martinrea International to develop a Supply Chain Resiliency Platform solution.
Palantir has strong growth prospects, but it needs time. Several hurdles hinder its stock price growth in the short term.
Palantir’s Short-term Challenges
Although its top-line is showing growth, Palantir is still making losses, and the primary cause of that is the significant stock-based compensation bill. The company gives its employees stocks instead of cash which dilutes shareholders’ interest. Its adjusted share count surged from 1.49 billion shares in 2020 to 2.32 billion shares in 2021. This stock-based compensation is also eating up profits.
The company reported a 2021 adjusted operating profit of $473.45 million. But after adding the stock-based compensation of $778 million, it converted into an operating loss of $411 million. The company is reducing its stock-based compensation bill (down 38.7% in 2021) to keep it attractive for shareholders.
Another challenge is its shift in focus from government clients to private players. Very few companies successfully pull off the shift in primary focus. Moreover, the company is increasingly spending on selling and distribution while slowing its research and development spending. If the company fails to keep up with tech trends, its revenue could take a hit.
The stock is currently trading at 14 times its sales per share which is lower than its competitors, ServiceNow (17.65x) and Snowflake (54.7x).
Should You Buy Palantir Stock?
After weighing the bulls and bears, I suggest buying Palantir with a five-to-seven-year investment horizon. The stock could face significant volatility in the short term because of its stock-based compensation and shift to private clientele. If it successfully turns the ship around, it could generate significant returns. Palantir has high risk, but it also has high rewards.
Disclosure: The author holds no position mentioned in this article. Freedom Stocks has a disclosure policy.