Palantir Stock: After Earnings, Focus on the Long Term

Palantir shares sank after the company reported mixed earnings results. Here's what investors should know about the stock.

Palantir — one of the most traded stocks by individual investors — reported fourth-quarter results before the market opened on February 17.

Investors had been hoping this would mark a turning point for the company, whose shares have been down more than 60% from their historic high.

However, the opposite happened. Palantir stock plunged more than 15% during Thursday's session.

Figure 1: Palantir Stock Earnings: Focus On The Long Haul

Mixed Q4 Results Didn't Please Investors

Although Palantir's fourth-quarter earnings didn't please PLTR investors, they were far from terrible. The software company reported earnings per share (EPS) of 2 cents — a 2-cent miss from the 4 cents Wall Street had expected.

Still, Palantir's EPS would have been better if it weren't for the unrealized losses on marketable securities. These losses may continue to distort EPS going forward. Palantir also reported that it expects to see continued volatility in its EPS due to these holdings.

In terms of revenue, the company beat expectations once again. Palantir reported $433 million, versus Wall Street's estimate of $418 million. That implies 26% year-over-year growth. Commercial revenues were $194 million, representing a 47% year-over-year increase. And government revenues were $239 million, a 26% increase.

The low point was the net loss of $159.1 million reported by Palantir. This was deeper than the $148.3 million loss seen in the fourth quarter of 2020. However, the loss was due to high investment in sales and marketing. Q4 marketing expenses grew 65% quarter-over-quarter.

Finally, the soft guidance given by Palantir for Q1 also left something to be desired. The company expects revenues to be in line with Q4's — $443 million with an adjusted operating margin of 23%.

However, Palantir continues to expect annual revenue growth of 30% or more by 2025.

What's Next for Palantir Stock?

Palantir earnings showed that the company continues to be a strong revenue generator and is making key investments to make its business profitable. But there are still doubts hanging in the air.

However, the biggest factor in the strong devaluation of Palantir stock appears to be its stretched valuation. It's currently trading at a price-to-earnings (P/E) of 79 times (compared to the industry average of 22 times). The market is possibly interpreting that the multiple is too high for annual revenue growth of 30% by 2025.

Figure 2: PLTR price-to-earnings ratio.

Now, looking long term, with Palantir focusing on expanding its commercial business and its Foundry platform, the company has good prospects of maintaining its accelerated growth.

However, in the short term, the stock should continue to see high volatility due to the current macroeconomic moment that has been punishing companies with high multiples and low or no profitability.