Palantir Technologies (NYSE:PLTR) stock has always garnered significant attention, because of high-profile contracts with government and intelligence agencies. With each technological advancement, such as blockchain and AI, Palantir’s potential to excel has generated renewed enthusiasm.
Palantir’s financial performance, in retrospect, has been consistently underwhelming. Some analysts have categorized the company as more of a “glorified consultant” rather than a trailblazing tech innovator. While Palantir has secured noteworthy contracts and contributed valuable work, it faces competition from consulting firms that are more profitable.
Quarterly Earnings Very Impressive
Despite the current AI trend, Palantir’s revenue growth remains modest, and its shares trade at over 65-times forward earnings, which could pose challenges in a bear market.
In its third-quarter report released on November 2, Palantir saw a 17% rise in revenue, climbing to $558 million from $478 million year-over-year. The company’s net income was $72 million, or 3 cents per share, in contrast to a net loss of $123.9 million in the previous year’s quarter.
This marked the fourth consecutive quarter of profitability for Palantir, making it eligible for S&P 500 inclusion.
Palantir’s CEO, Alex Karp, emphasized that the company exclusively serves Western allies and supports the U.S. government.
He expressed pride in aiding Israel. The firm’s U.S. commercial revenue and customer count both saw significant year-over-year growth, with a 33% increase in revenue and a 37% rise in the customer count.
Palantir is Slow on AI
Analysts anticipate Palantir’s artificial intelligence platform becoming a significant revenue driver, with CEO Alex Karp noting its rapid adoption across various industries. If Palantir achieves a GAAP profit, it may join the S&P 500, potentially boosting its share price as index-tracking funds invest.
However, analysts from Morningstar have raised concerns about Palantir’s ability to implement its AIP growth strategy. The executive team’s execution track record, according to Morningstar’s Tom Lauricella, has been questionable.
Palantir’s Extreme Cash Burn
Palantir faced substantial cash outflows. In 2019, its operations used $165 million, amounting to 22% of its revenue, marking a significant increase from the prior year. In 2018, the company’s negative cash flow was $39 million. Its 2019 cash burn skyrocketed by 323% despite a 25% revenue increase.
Additionally, Palantir’s cost structure was notably high, accounting for 105% of revenue, with sales and marketing expenses at 61% of revenue and general and administrative costs at 44% for 2019. Even after 17 years in operation, Palantir struggled to achieve profitability.
The question loomed whether the company’s executive team could alter this trajectory now that it had gone public.
Now’s Not the Time to Gamble on this Name
The company’s heavy reliance on stock-based compensation has led to share dilution, affecting the value of existing shares despite revenue growth. For instance, while total revenue surged by over 126%, revenue per share only increased by 13% due to a 35% increase in outstanding shares.
While Q3 results look optimistic, it’s essential for investors to observe this company’s fundamentals. On a purely fundamentals basis, this stock looks more expensive than it has in some time, leading some value investors and analysts to highlight their concerns.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.