Investing in the stock
In the short run, the stock movement is still volatile. The long-term returns seem rewarding.
What does Palantir(PLTR) do ?
Palantir engages in government contracts to build and deploy software platforms for the intelligence community in the United States to assist in counterterrorism investigations and operations. If it had stayed this course, the growth will be limited. But lately, Palantir has started to engage with enterprises in the B2B sector as well as offering artificial intelligence solutions. The potential is huge.
Massive cost in Sales and Marketing
In 2020, Palantir generated a little more than 1 billion dollars in revenue and spent 1.3 billion dollars in sales and marketing. Now you may think that is a mismanagement. That is however not the case, it is essential to spend a substantial amount on sales and marketing due to huge competition in the software industry. Building the software for clients does not cost much and the only other cost is labor, it is more important to engage a customer and keep the customers for the long term.
Palantir’s business model happens in three stages. In the first phase, they earn $50,000 to $100,000 per customer, but in the second phase, they lose about $500,000 per customer. The reason is putting tons of effort and resources into the initial phase of onboarding a customer. This is their standard sales process. In the final phase, an average customer in the long term generates about 63 million dollars. This makes up the high cost of the initial phase.
Valuating the business
Palantir’s management is forecasting four times revenue in 2025 which makes it about 6 billion dollars. Using Microsoft’s Free Cash Flow(FCF) yield of 2.6% as a benchmark, we use $6 billion divided by 2.6% works out to a market capitalization of $230 billion which is five times today’s market capitalization meaning the stock is worth around the range of $120. It might seem too optimistic, let’s say we half the management’s estimate on the revenue we still get the stock worth $60. This is roughly three times the share price today.
Disclaimer: Always do your due diligence before investing in a stock. Investing of any kind involves risk. I am not a financial advisor. Your investments are solely your responsibility and I do not provide personalized investment advice. It is crucial that you conduct your own research. I am merely sharing my opinion with no guarantee of gains or losses on investments. Please consult your financial or tax professional prior to making an investment.