Shares in fast-growing data analytics company Palantir (NYSE: PLTR) have underperformed this year. Yesterday, the stock took a big hit on the back of the company’s Q4 2021 results.
This is a company I’ve always thought looks quite interesting due to the fact that it has contracts with a number of government organisations including the FBI, CIA, and the UK’s NHS. Has the share price fall provided an attractive entry point for me? Let’s take a look.
Why did Palantir stock fall?
I can see why Palantir stock has fallen after the Q4 earnings. For starters, adjusted earnings per share for the quarter came in at two cents, well below Wall Street’s estimate for four cents.
Secondly, guidance for this year was a little disappointing. For 2022, the company expects an adjusted operating margin of 27%. That’s lower than 2021’s 31%.
Impressive growth
However, stepping back a bit and looking at the bigger picture, I think the results were pretty solid.
For Q4, total revenue grew 34% year-on-year to $433m. Within that, commercial revenue rose 47% year-on-year while government revenue grew 26% compared to a year ago. During the quarter, the company added 34 net new customers and closed 64 deals worth $1m, or more.
Meanwhile for 2021, total revenue jumped 41% year-on-year to $1.54bn, with commercial revenue and government revenue up 34% and 47% respectively.
And looking ahead, the company expects to keep growing at a healthy pace. Between now and 2025, it expects annual revenue growth of at least 30%.
These numbers suggest the growth story here is still very much intact.
PLTR: risk vs reward
Of course, as always, it comes down to risk versus reward. Is the valuation at a level where the stock’s risk/reward profile is attractive?
Well, assuming Palantir can generate 30% revenue growth in 2022, that would take its sales for the year to around $2bn. This means that at the current share price and market-cap ($28bn), the forward-looking price-to-sales ratio is around 14.
That is a little bit high for my liking, to be honest. Given the growth rate here, I’d prefer to pay a price-to-sales ratio closer to 10. The current valuation adds a bit of risk, in my view.
Another risk to consider here is Palantir’s reliance on large deals with a few customers. If one or more of these customers was to cancel its contract, revenue could take a hit.
An additional risk is lower-than-expected earnings. At present, Palantir aims to generate earnings per share of 20.5 cents for 2022 (this figure will probably fall after the recent guidance). However, the group may not achieve this if it is investing for growth in 2022. This could result in share price volatility.
My move now
Weighing everything up, I’m going to leave Palantir stock on my watchlist for now.
I think the stock is starting to look interesting after the recent share price fall. Growth is impressive and the company has a distinguished list of customers. However, given the valuation, the stock doesn’t make my ‘best stocks to buy now’ list.