It is my view that the market is never wrong. When a move makes no sense, it is much more likely that you have missed something rather than the collective wisdom of millions. Still, even though I am certain that is true, and have both made a lot of money and avoided a lot of mistakes by keeping this in mind at all times, there are occasions when even I am puzzled.
This morning, Palantir (PLTR) released earnings and just after they did, the stock accelerated pre-release losses and, at one point was around ten percent below yesterday’s close, a level that itself was around fifty-nine percent below the January high. Now, one could argue that the high was way overdone and that the stock had gotten too far ahead of itself, and I would have been sympathetic to that argument. What makes no sense to me, though, is that this morning’s earnings have actually addressed the issues that might have caused that concern.
The first and most obvious thing is that Palantir, for the first time in its short history as a public company, actually turned a profit in Q1 2021. Yes, it was “only” $0.04 per share, but in the modern world any company, and particularly a tech company, showing positive EPS after less than a year of public reporting is pretty impressive. I get that that $0.04 fell short of a “whisper number” that was significantly more, but the way it was achieved should more than make up for that short-term disappointment.
That profit came on revenue growth of forty-nine percent. As with all companies, it is hard to gauge exactly what that means given the distortions inherent in the quarters that it can be compared to, but it easily exceeded Wall Street estimates going in. For me, though, the reassuring thing about that growth was the way it was achieved.
The problem that I had with PLTR to this point is that the company is overly dependent upon government contracts. As any defense industry stockholder or CEO will tell you, that isn’t necessarily a bad thing given that the federal government so often spends like a drunken sailor. However, the issue with Palantir is that they are seen by many people as too overtly political themselves. Co-founder Peter Thiel is well known as a kind of radical Libertarian, and in the current political environment, that makes him in danger of being persona non grata with both sides of the aisle. I suppose that shouldn’t make any difference to the company’s prospects, but this is Washington we are talking about, a city run on perceived slights.
The fact that PLTR showed impressive revenue growth at all in the first quarter of the Biden administration is reassuring, as is the fact that these results showed them becoming gradually less dependent on government largesse. When they went public last fall, the prospectus indicated that they had 125 customers, a number that increased to 149 last quarter, and commercial revenue grew by 72% YoY.
Usually, when confronted with post-earnings move that seems illogical, you just have to dig a little deeper into the numbers. In this case, however, the deeper I go, the more it seems that this move down is unsustainable. Customer and revenue growth were good, as was the earnings mix. Guidance for next quarter was stronger than anticipated. The only logical conclusion then, is that PLTR is falling because it is caught up in the general risk-off, selloff in tech this morning, even though their earnings show that they are moving away from being unprofitable.
That is why I bought the stock this morning, and even though as I write, most of this morning’s losses are being regained, it still looks like a bargain to me at current levels.
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