After yesterday’s market close, two companies founded in part by Peter Thiel reported earnings, with very different market reactions. Both the payment company PayPal (PYPL), which Thiel co-founded back in 1998 and the success of which formed the basis of both his reputation and his wealth, and his more recently co-founded company, Palantir (PLTR), beat expectations for Q1 2023 earnings. However, one is trading significantly lower in this morning’s premarket, while the other is soaring.
PayPal reported EPS of $1.17 versus a consensus estimate of around $0.83 but is around seven percent below yesterday’s close as I write, while Palantir made a profit of $0.05 per share as opposed to the expected break-even quarter and is up around fifteen percent. The differing reactions show the importance for investors of looking beyond the headline number when assessing earnings, but they also demonstrate something that I have said here many times: traders overreact to news.
The reactions are not about the Q1 results. They are instead a reaction to the forward guidance offered by each company or, more accurately, the tone of that guidance. PayPal did increase its profit outlook for the full year but did so by less than the market had anticipated, with a large part of the increased profitability coming from cutting staff and other costs. Palantir, on the other hand, gave a relentlessly upbeat view of their future, even managing to fit the greatest buzzword of our time, AI, into their projections.
In each case, the market’s immediate reaction was logical enough from a short-term perspective but looks like a big overreaction and a move to fade when longer-term considerations are considered.
PayPal’s cuts may look drastic and a little worrying, but they are really just part of a retracement back to pre-pandemic levels. When we were all stuck at home, e-commerce payments skyrocketed and PYPL had to gear up rapidly to meet that demand. Once we got back to in-person shopping, a drop off was inevitable. While one could maybe criticize the company for not reacting quickly enough to that reality, job cuts and slightly conservative guidance at this point should hardly be a shock.
Once you get past that, there are long-term reasons to buy PYPL. The events of the last few years have shown that even with increased competition, PayPal benefits from growth in online purchases more than anything, and there is still enormous potential in that space. It may seem like we live our lives entirely online, but from a shopping perspective, that just isn’t true yet. In 2022, only 15% of retail sales were online, a number that is expected to grow to around 22% by 2025. Clearly, while the adjustment back from pandemic levels of growth and staffing is painful, the medium-term future for PayPal is encouraging.
We have seen this before with PYPL, too. Their Q3 2022 earnings on November 3 (white arrow on the above chart) were also better than expected but came with a downbeat commentary. Then too, the stock reacted badly, but that dip set up a big rally.
On the other hand, Palantir’s future may look bright given the obsession with AI, but there is a dark cloud looming that seems to be be overlooked. The company started out as almost entirely focused on government work, which is a bit ironic considering the well-publicized libertarian views of Thiel and co-founder and CEO Alex Karp. They have made a conscious effort to move away from feeding entirely at the big government trough and have had some success, shifting to where around forty percent of their revenue comes from the private sector. That still leaves around sixty percent coming from the government, and right now, with a focus on spending cuts in Congress as yet another debt ceiling fight heats up, that isn’t necessarily the stable revenue source that it sometimes appears to be.
We don’t have to look a long way back in PLTR’s history to find a similar quarter and a similar reaction either.
Last quarter, PLTR reported a tiny profit rather than the expected small loss, and also offered an upbeat commentary. The stock jumped then too, before giving back all the gains in around a week.
Of course, past performance is no guarantee of future results, but I do have a strong sense of déjà vu this morning as I look at both charts. The similarity between what we are seeing this morning and what we saw recently in both cases makes it most likely that once the dust settles the patterns will be repeated, with PLTR dropping back and PYPL bouncing back and I, for one, will be positioning for just that.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
Read Martin's Bio