Palantir stock: is now the time to buy?

Palantir stock is cheaper now than at its IPO. Can this knockdown price tempt me to forget my concerns and buy?

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Palantir (NYSE: PLTR) hit the stock markets in September 2020 at $10 per share. By January 2021, the Palantir stock price had surged to $45. That turned out to be an all-time high. It has since tumbled to about $7.8 at the time of writing.

Any investor that has bought Palantir must be disappointed so far. But given I could buy shares in the company for less than its IPO price right now, I think it’s worth considering if I should add it to my portfolio.

What I like about Palantir stock

Palantir builds platforms for integrating, managing, securing, and analysing data. It started 17 years ago, providing counterterrorism intelligence to the US government. Now, the company can boast contracts with multiple governmental organisations, including the CIA, FBI and, more recently, the UK’s NHS. Some 58% of revenues come from government sources today. The rest come, unsurprisingly, from the private commercial sector.

Despite being around for a while, Palantir grew its revenues at a very impressive 37% on average per year from 2018 to 2021. According to the latest quarterly results, government revenue grew 13% yearly, with commercial revenue increasing 46% yearly. 

I do have concerns

Despite impressive growth, Palantir has never been profitable. The company expects that to change in 2025. While it’s not uncommon to see large stock-option grants in the years immediately following an IPO, Palantir’s generosity to its senior executives is extraordinary. It granted $1.27bn worth of stock options in 2020, surpassing the company’s revenue for that year.

Now, it could be argued that the company relies on options rather than salaries to reward its management, and that giving them skin in the game is a good thing. However, since 2020, the company’s top management and board members have sold $1.9bn worth of stock. That cannot be seen as a vote of confidence in the company’s future stock price direction. 

Then I have some concerns about the scalability of the company’s product. It embeds its engineers with its customers to better understand their needs and tailor its platforms to their requirements. That’s good for the customer and the relationship. But this is not a turnkey software operation. Each new contract requires new engineers unless they complete one after the other. That sounds expensive and should squeeze margins but looking at Palantir’s accounts and removing the stock-based compensation expense, they don’t, which is odd.

Now that concern is somewhat alleviated by the fall in Palantir’s stock price. Its price-to-sales ratio of nine is more fitting to the type of growth engine I see driving the company than the 30 it once was: that’s more in line with, say, a younger Microsoft, selling bundled software packages that run out of the box.

Would I add Palantir stock to my portfolio?

Despite the impressive growth, I am not convinced by Palantir stock even at this low price. I want to see how costs change as that stock-based compensation expense drops, and it should. I would like to see the company turn convincingly towards that 2025 target for profitability. It will take time to address my concerns. So, I won’t be buying Palantir for my Stocks and Shares ISA in 2022.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James McCombie has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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