The performance of Palantir (NYSE:PLTR) stock was unimpressive for most of 2021. After a strong listing in September 2020, the stock gained almost 250% by January 2021. However, PLTR stock subsequently retreated on both macro and micro factors. It’s now down nearly 60% over the past 12 months. But is all hope lost for this once booming stock?
Let’s consider a few important things before determining whether Palantir stock is a buy again.
First, a major, company-specific reason for the stock’s decline has been its decelerating growth rates. This is especially true in the government-based segment of its business (a key driver for the company in the past).
The revenue growth in this segment was 34% in Q3 2021, which is down significantly from growth of 66% in Q2 2021 and 76% in Q1 2021. Covid-19 related contracts supported Palantir’s growth in the earlier period, but the impact of this catalyst has dissipated.
Another reason has been negative GAAP operating income. Although on an adjusted basis, PLTR has delivered operating profits, the company has not been able to generate profits on a GAAP basis. Higher stock-based compensation expense has been the primary reason.
PLTR Stock Is Attractive at Current Valuations
At the current price of $13.18, the shares are down more than 60% from its highs of $35.18 in January 2021. I believe the recent contract wins and the company’s ability to generate positive free cash flow, despite depressing profits are positives.
From the valuation perspective, PLTR stock seems undervalued. It is currently trading at a price-to-sales multiple of 17.65 times trailing-twelve-month sales per share. This is at a discount compared to its closest competitor Snowflake Inc (NYSE:SNOW), which is trading at a P/S of 89.26x sales per share.
Although revenue growth has deteriorated in the government segment of its business, Palantir has garnered several multi-million-dollar contracts that span the course of multiple years.
Notable deals include a $43 million contract from Space Systems Command, $116 million contract from Army Vantage and an $823 million contract with the U.S. Army. These are just a few deals where it will provide intelligence data and analytical solutions.
These contract wins should give investors confidence in the credibility of the company’s software. Fortunately for PLTR, government contracts are mostly long-term and insulated from macro-economic fluctuations.
Understanding Palantir’s Significant Market Opportunity
Palantir’s software combines data from various systems and analyses and identifies trends to help organizations make informed business decisions to remain competitive. The global big data market, in which PLTR resides, is expected to reach $684.12 billion by 2030 from $198.08 billion in 2020.
In my view, the company should perform well going forward based on the opportunities arising in the market.
My opinion is underscored by average analyst forecasts with a median price target of $21.33. This reflects an upside potential of 61.84%. Even the lower end of the forecasted target price of $18 represents 36% growth from the current price.
PLTR Is Operationally Strong
Overall, the company’s operating performance has remained robust. An important metric to consider is remaining performance obligations (RPOs). It shows non-cancellable contracted revenue that has not yet been recognized.
Total RPOs in the Q3 2021 were $873.9 million, up from $671.9 million in Q2 2021 and $625.9 million in Q1 2021. The rising RPOs suggests a growing number of long-term contracts.
Further, an order backlog of $3.6 million in Q3 2021 shows 50% expansion from prior year. Based on rising orders, management has guided top-line growth in excess of 30% over the next four years. This looks achievable given the order backlog and rising number of contracts.
The company’s commercial business is also doing well. It has clients mainly in the financial services, healthcare and automotive sector. All these are up for a major growth in the coming years. As such, PLTR stock is well positioned for future gains. The cherry on top of it all? Commercial revenues have gradually accelerated from 4% in Q4 2020 to 37% in Q3 2021. This is particularly true in the U.S. commercial revenue growth rate, which has grown to 103% year-over-year.
Palantir has also expanded its alliance with several leading industry players in the segment. Some of the notable deals include contracts with Ferrari (NYSE:RACE), Merck (NYSE:MRK) and Kinder Morgan (NYSE:KMI), among numerous other established names.
Healthy orders have led to an increase in cash flows. Total operating cash flow was $240 million in the first nine months of 2021. This is a significant improvement, as its cash burn was $278 million in the same period for the prior year. Management expects adjusted free cash flow of $400 million for 2021.
Bottom Line on PLTR Stock
Palantir is well positioned to benefit from numerous rising opportunities in the big data industry. The company is continually enhancing its customer base in both government and commercial segments, which means its margins should ultimately improve.
While the company has been delivering improved results, few negatives are overshadowing its performance. The expected Q4 2021 results should provide catalysts for growth. With all of this in mind, Palantir’s stock looks attractive at its current price.
On the date of publication, Sakshi Agarwalla 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.
Sakshi Agarwalla has more than eight years of experience writing equity research reports and preparing financial models for companies across various industries, as well as writing newsletters and financial articles. Recently, she assisted her Fund manager in executing trades, preparing weekly, monthly NAVs and writing newsletters. She has a postgraduate degree in finance and has completed CFA.