Our Analysis of Palantir Technologies Inc. (NASDAQ: PLTR)

We have been doing our "Quantamental" analysis of widely owned stocks for over three months.

We have analyzed all the “Magnificent Seven” as well as other mega-caps like Berkshire Hathaway Inc. (NYSE: BRK/B) and other large companies in the news like NIKE, Inc. (NYSE: NKE) and Visa Inc. (NYSE: V).

Next week, we will review our initial views on all these companies and how they have matched up with stock performance.

This week, though, we will look at one of the more interesting stock stories: Palantir Technologies Inc. (NASDAQ: PLTR).

Some of you may be unfamiliar with PLTR. They are a leader in software for "big data" analytics.

This means they develop software to take massive amounts of generated data and create valuable insights or conclusions. Private companies can use these to optimize their operations and profitability.

Governments can also use them for intelligence or military applications. The government makes up more than half of their total revenue.

The company was founded by PayPal co-founder Peter Thiel using an early investment from the Central Intelligence Agency. Although it struggled initially, it has since become an almost $3 billion revenue market leader.

The company came public via a direct listing IPO back in September 2020.

This is a reminder that our "Quantamental" analysis is not a formal stock recommendation but a quick analytical tool that gives an initial view of the stock in the short and intermediate term.

Here is the analysis…

1. Technical Analysis

Since coming public back in 2020, PLTR has had an up-and-down history as a publicly traded stock.

Here is the chart since the IPO…

As mentioned above, the company went public via a "direct listing."

This is a method of taking a company public in which the company does not raise any money, and shares are listed on a public exchange with no banks or brokers involved. In theory, this is a more efficient process.

The stock was initially priced at $10 per share but quickly traded below that price, reaching a low of $7.25 on the first day of trading.

Within a couple of months, though, the stock moved higher in the 2021 COVID mini-bubble BULL market.

The company’s position as a cutting-edge software company with extensive exposure to difficult-to-access growth areas made it a popular stock.

The stock collapsed during the post-COVID BEAR market and traded as low as $6 per share at the end of 2022.

Since then, however, it has recovered nicely and has recently traded at new highs.

Here is the recent stock price and RSI chart…

The chart above starts at the end of 2022 and is timed perfectly with the stock's bottom. Since then, the stock has been up more than sixfold and has had a huge run.

Below, we will discuss what has driven the stock higher, but it is now clearly a market leader.

From our "Quantamental" perspective, we like the stock's long-term performance. The stock market is rewarding the company's unique positioning in the stock price.

The company's market cap is now approaching $100 billion, making it more attractive to both institutional and retail investors.

These long-term solid trends are very positive for the stock.

In the short term, though, we would be cautious given how overbought the stock has become, with an RSI of over 75.

The recent overbought levels are a good sign for the intermediate term (months) but usually a bad sign for the short term (weeks).

If you wanted to own the stock but didn't have a position, we would start a small one. Otherwise, we would be patient and wait for a pullback in the stock.

The technical setup is very constructive, but stocks this overbought almost always consolidate. They usually do not do this by trading sideways. We think patience makes sense here.

TECHNICAL ANALYSIS = AVOID.

2. Earnings Revisions

Our readers know the most vital driver of near-term stock price performance is whether companies beat numbers and see positive earnings revisions.

We refer to them as “earnings” revisions, but they can also be revenue revisions. We usually look at not only the most popular measure—earnings per share (EPS)—but also other measures, such as Earnings Before Interest, Depreciation, and Amortization (EBITDA).

Like many newly public software companies, PLTR has only recently become profitable on an EPS basis. While they are only recently profitable, we think EPS revisions are the key metric for the stock.

Here is the chart of the EPS revisions for 2024 estimates…

The EPS estimates took a similar trajectory to many other technology stocks. As we came out of the enthusiasm of the COVID period and the mini-bubble in the stock market, the company saw negative revisions for a year.

As we would expect, this drove the share price lower. The estimates bottomed at the end of 2022 and have increased since then, driving the stock price higher.

We suspect part of this was driven by the company just getting a handle on its operations as a newly public entity.

Going public towards the end of 2020 launched them into an economically volatile period. We are not surprised that it took them some time to find their footing from a forecasting standpoint.

Their business model, though—software platforms—should give them good visibility, and this has now played out in the estimates and stock.

You can also see this happening in their quarterly reporting.

Earnings revisions have turned higher in the last year, and the company has a good history of beating quarterly analysts’ expectations.

Here is that table…

Remember that the company has only recently become profitable, so there is much volatility in the numbers. When earning less than $0.10 per quarter, it doesn't take much to see a big move relative to expectations.

What we saw play out in the earnings revisions, you can also see here in the quarterly reports.

It does appear, though, that the company has been able to get a handle on forecasting this business.

Again, given that their business is a software platform – and one with strong fundamental demand – we think that both these positive trends are likely to continue.

On this basis, we think the stock is a buy.

EARNINGS REVISIONS = BUY

3. Earnings Growth

The final measure we focus on is the actual growth in earnings.

Our most important rule in stock picking is that if a company is earning $1 per share and eventually earns $10 per share, the stock goes up—a lot.

It may happen now, or it may happen later. It may go up more or less than the level of growth in EPS. It always, however, goes up!

Here is the table for the EPS results of PLTR since going public and into the new year…

The company has just become profitable, but they are putting up some strong EPS growth.

The current analyst estimates for the next couple of years strike us as conservative. Their business model, strong demand for their products, and operational momentum should lead to estimates continuing to rise.

We wouldn't be surprised if the company earned $1 in the coming years. The earnings potential for their end market is high.

Given the existing trends, total addressable market, company positioning, and execution – we think there is a bright outlook for earnings growth at PLTR.

Based on that growth, we think the stock is attractive.

EARNINGS GROWTH – BUY

Conclusion

We rarely speak about valuation in our "Quantamental" analysis framework because we do not believe it is a significant driver of stock prices.

If companies are growing and beating numbers, the stocks will go up. Again – maybe a little, perhaps a lot, and maybe now or later, but they DO go up.

Right now, PLTR trades at almost 100x next year’s EPS number.

Do we think that it can trade at an even higher multiple? It can!

However, this is a much more expensive stock than any of the other companies we have analyzed with our "Quantamental" approach.

We think at these multiples, there must be an understanding that extreme volatility can occur based on very little information.

A stock trading at 100 times earnings can just as easily trade at 200 times earnings. It can also easily trade at 30 times earnings.

Remember that we say stocks are not companies.

PLTR is in a unique position, given its end-market exposure. Investors looking to participate in the analysis of “big data,” emerging uses for artificial intelligence, and a call option on global insecurity do not have many other options. PLTR is an excellent fit with these themes.

Given the valuation, we think it makes sense to have a quick trigger.

Right now, with the stock at very steep overbought levels, we would hold off entering a position, but we do think the stock can/will be higher in the coming months and years.