Shares of Palantir dropped about 11% in Tuesday's trading session after the company posted an unexpected loss in its Q4 2020 quarterly report. This is the stock’s worst performance since December 2nd. The stock has slid by as much as 12% in the last week.
The data analytics company reported a per-share loss of 8 cents, though revenue of $322 million topped analyst expectations of $300.7 million. Palantir said it closed 21 deals worth at least $5 million in total contract value during the three months ended Dec. 31. Palantir said it expects to earn $4 billion in revenue in 2025.
The tight-lipped data analytics company debuted through a direct listing on the New York Stock Exchange in September with much fanfare as investors were understandably excited about the company's prospects. Shares of the company have performed remarkably well during its short time as a public company, rallying by as much as 176% since its market debut.
However, at this point, it would be natural to question whether the share price has gotten ahead of the business projections.
Trading above its valuation
The company expects to generate $1.07 billion to $1.072 bn in revenue in 2020. Assuming that forecast bears out, the market is currently valuing the company at about 45 times sales. This makes the company seem overvalued, especially when compared with IT-focused government contractors such as Booz Allen Hamilton, ManTech International, and Leidos Holdings.
Government-centered business
Secondly, Palantir has built its business mainly on lucrative government deals for its data analytics software, including ICE. The company has been more willing to work with government agencies than other California-based tech companies. 56% of its revenue in Q3 came from its government segment, which has grown faster than its commercial business. Given the pace of government contracting and its retail offerings' slow rollout, it may take years for Palantir's business to justify its current lofty multiple.
High short interest on the stock.
Thirdly, the stock is one of the heavily shorted stocks in the market. The current short volume ratio stands at about 18%. This means that many investors are not really optimistic about the company and its current valuation.
Conclusion
Palantir has amazing and unique tech and has the potential to grow into a much larger business, but the combination of these factors further conscript the price action of the stock. Based on this, we expect Palantir shares to fall further, or at least trade within a narrow range. The litmus test will be the company's Q1 2021 report. If the company is unable to beat analysts’ expectations. We may expect its prices to crater.
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