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Sometimes stock markets go through periods of volatility where quality companies get battered beyond what they deserve. Palantir Technologies (NYSE: PLTR) is one such stock. The company closed May 19 at $8.31, down over 55% year-to-date and 72% lower from its 52-week high of $29.29.
Palantir is a firm that deploys software for the intelligence community, mainly in the U.S. This includes counter-terrorism services to government agencies, and the company also services large institutions and commercial organizations.
With the current geopolitical tensions, the year should have been a bountiful one for Palantir and the markets should have rewarded it. Instead, they have beaten the stock down.
Palantir reports mixed Q1 2022 earnings
Palantir released its Q1 2022 earnings roughly 10 days back and the numbers missed estimates. Total revenue grew 31% year-over-year to $446 million with government revenue up 16% compared to the corresponding period in 2021, and customer count up 86% year-over-year. Adjusted earnings came in at $0.02 per share while expectations were for $0.04 per share.
Markets weren’t happy with the numbers and they also didn’t like the fact that Q2 guidance was below estimates. The fact that government business only grew 16% compared to 81% in the year-ago period also caused a drop in PLTR stock.
Palantir forecast revenue of $470 million in Q2, compared to estimates of $483 million. It explained, “There is a wide range of potential upside to our guidance, including those driven by our role in responding to developing geopolitical events.” The company expects an adjusted operating margin of 20% for Q2.
For 2022, Palantir expects an adjusted operating margin of 27%. Palantir CEO Alex Karp said that he estimates “annual revenue growth of 30% or greater through 2025.”
One important point in Palantir’s favor was that its operating margins were negative 9% in the March quarter compared to negative 33% in Q1 of 2021. At the end of Q1, the company also had $2.3 billion in cash and no debt, providing it with enough liquidity to support its cash burn.
What next for PLT stock?
In the company’s post-earnings conference call, Palantir said that bad times are good for the company. Palantir COO Shyam Shankar said that its products have become more relevant than ever. The company is helping governments across Europe with relief and refugee operations.
Apart from relief, Palantir said that the software built for a stable world can’t function. Rising inflation, supply chain disruptions, and the impact of severe lockdowns in China are changing the way the world operates, and Palantir’s products are the answer. He gave an example of the company’s “work with Tyson Foods that is delivering $10 million of value realization every week by moving them from legacy approaches.”
However, not all of this is palatable to some analysts. Rishi Jaluria, RBC Capital analyst, cut down his estimate for PLTR stock from $12 to $6. Citigroup’s Tyler Radke wrote, “Palantir’s underlying growth continued to slow in Q1 with the smallest quarterly revenue beat to date and Q2 guidance below the Street and the company’s 30% target.” He cut his target from $10 to $7.
The company’s financials have been improving steadily. Right now, the investing climate is such that any negative news warrants an overreaction from investors. The 12-month average target price for the stock is $12.12, a potential upside of over 51%.
Palantir’s commercial customers have grown 86% in Q1 which is a good sign for the company. If Palantir is unable to meet its 30% growth target until 2025, it could be a deterrent for the stock.
Potential Palantir investors have to accept that there will be bouts of volatility which could further hammer the stock but once sanity returns to the markets, PLTR is likely to move up over the long run.