Interactive Investor

This $40bn share is being tipped for glory

It’s spending big on long-term growth, and this volatile stock also has appeal for active traders.

19th May 2021 11:40

Rodney Hobson from interactive investor

It’s spending big on long-term growth, and this volatile stock also has appeal for active traders.

Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.

It could be the next big tech success story. A lot of investors are convinced that it will be. Yet caution is still required at Palantir Technologies (NYSE:PLTR), which is following a well-worn path that leads to gloom or glory.

Palantir, based in Colorado, specialises in technology for handling large quantities of data. Founded in 2003, it has seen revenues start to snowball and the future could be gigantic. However, it is still racking up losses. A great deal has to be taken on trust.

The shares, which were listed in September, were among those that took off earlier this year when investors using the Reddit social news website were whipped up into a frenzy against short sellers, although GameStop (NYSE:GME) captured most of the headlines. 

In less than two months Palantir shares quadrupled to $39, but they now look more reasonably priced after sinking back to around $20. However, the latest quarterly results have failed to reignite enthusiasm for the stock. 

Source: interactive investor. Past performance is not a guide to future performance

Figures for the first quarter of 2021 showed a net loss of $123 million, or 7 cents a share, although underlying figures suggested earnings per share of 4 cents, in line with forecasts, and revenue leapt 49% to a better than expected $341.2 million.

The problem is that Palantir remains too reliant on US government contracts. It began life working for the CIA and the US Defense Department and, despite a determined attempt to break into the commercial sector, it is government business that still accounts for more than 60%. 

In fact, government revenue grew 83% in the first quarter, far outstripping private sector revenue which was up only 19%. This continues the trend of the previous two quarters, when sales to government for use in intelligence gathering, counterterrorism and the military raced far ahead of those to companies.

That could change, though, as Palantir attempts to expand into healthcare, energy and manufacturing. It caters for large corporate customers that can buy big. Average revenue from each customer is more than $8 million a year and Palantir has the ability to scale up the contracts. It will also get a boost from a sales agreement signed with International Business Machines (NYSE:IBM) earlier this year.

Last month it launched its Apollo artificial intelligence product for use in complex systems. This is a potential big winner that can be used in a wide range of fields from automating factories to sensing malfunctions on oil rigs.

It is difficult to put a genuine stock market valuation on Palantir because it came to market through a direct listing, in which existing investors retained their holdings, rather through a public offering that immediately creates a wider spread of shareholdings. So, trading initially depended on longstanding shareholders dribbling out parts of their holdings into the market, a process that is likely to create erratic trading.

There is nothing sinister in this. Streaming business Spotify Technology (NYSE:SPOT) in 2018  and communications firm Slack Technologies (NYSE:WORK) in 2019 also opted for a direct listing.

It does mean, though, that the reference price of $7.50 a share set by the New York Stock Exchange at the opening bell on the first morning of trading should be taken as somewhat arbitrary. Spotify also soared from its initial trading price before running into a sharp correction this year.

Palantir is unlikely to pay a dividend for several years as cash is ploughed into the expensive business of developing products and markets, so it is not for the dividend seeker. It does, though, have some appeal for those looking for the next big thing in technology companies and it is reasonably immune from newcomers attacking its markets. There is also an attraction for active traders hoping to cash in on volatile stocks.

Hobson’s choice: Don’t pay more than $22 at this stage and consider taking profits if the stock hits $40.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

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