2023-12-08 16:15:09 ET
Summary
- Palantir Technologies stock has fallen 15% since December 1st, causing concern among investors.
- We think that two things have primarily spooked investors since the start of December.
- Palantir's DSO rose dramatically in the last quarter, raising questions about the top line going forward.
Palantir Had An Interesting Week
Palantir Technologies Inc. ( PLTR ), the big-data analytics-slash-AI firm, has had a rough week. Since just December 1st, the stock is down 15%, leaving many investors scratching their heads and prompting a flurry of articles .
Of course, pulling back the lens a bit reveals that, yes, while 15% is quite a bit, those who have been holding the stock for a year or two are probably still pretty pleased with its overall performance.
The market, however, tends to operate on a "what have you done for me lately?" mentality, and most of the stock's gains this year came in May and June, with the stock largely ranging (albeit a relatively wide range) since then.
So what is driving this current, short-term underperformance and what do we think happens from here? Today, we'll attempt to answer those questions.
To Include, Or Not To Include?
One thing that investors may have glossed over in the last week is the fact that S&P made its quarterly announcement on additions and removals from its various indexes. Among the companies announced on December 1st to be included in the S&P 500 was Uber Technologies, Inc. ( UBER ). Notably absent from that list was Palantir.
Palantir's bulls and management have for some time speculated that with the stock's recent rally, S&P 500 (SP500) inclusion was on the horizon. In the Q2 conference call , S&P 500 inclusion was specifically mentioned as something the company thought could be on the horizon. CFO Dave Glazer had this to say:
We remain committed to driving profitable growth and we reaffirm our expectation of GAAP profitability in each quarter of this year, which would make us eligible for inclusion in the S&P 500 following our Q3 results.
Things got more specific in the Q&A that followed management's remarks:
Ana Soro
Thanks, Alex. Our next question is from [Josh Mark] (ph), who asks what's the latest on potential S&P 500 inclusion?
Dave Glazer
The latest is we expect to be eligible after we report Q3 and so we're proud to say we're less than a quarter away.
Alex Karp
From eligibility.
Dave Glazer
From eligibility.
Q3 results were released in early November, so it would not be surprising that traders making a play on an event-driven strategy (S&P Inclusion) may have bailed on the stock when the event didn't occur. The stock's recent dive took place immediately following the S&P announcement.
A Contract Question
Another bit of news also seems to have contributed to the stock's 14% decline -- reports that the U.S. Army's Army Data and Analytics Platform (known as ARDAP) may:
- Not renew the contract with Palantir (least likely), or
- Significantly reduce the contract and bring in additional vendors to the program (more likely).
The contract is currently worth $458 million over four years, and some analysts have speculated that the contract could be modified to $116 million over two years.
We have made this argument before on Palantir ( read it here ) that the company's reliance on government contracts (which are renewed on a year-to-year basis) and the fact that the majority of its contracts are cancelable is a major concern, especially because Palantir's software isn't exactly plug-and-play: the platform sometimes requires teams of Palantir employees to be maintained on-site with the customer.
To wit, Palantir makes this note in its risk factor summary on page 14 of the latest 10-K :
many of our customer contracts may be terminated by the customer at any time for convenience and may contain other provisions permitting the customer to discontinue contract performance
Now, if this is the only way that Palantir can do business, then that's fine. However, for investors who prefer to be able to see locked-in contracts and revenue in the pipeline years down the line, the chunkiness of revenue in a year-to-year business environment (not to mention the ability to terminate for convenience) may be difficult to stomach.
Rising Accounts Receivable
One thing that has troubled us about Palantir now and in the past is the company's accounts receivables balance. This represents cash from customers booked as revenue but not yet actually received by Palantir.
Analysts use a measure called Days Sales Outstanding [DSO] to measure a company's efficiency in collecting cash. A rising DSO could mean a number of things (like a company offering extended terms to customers to book the revenue), but it is generally thought of as not good.
Since going public Palantir has averaged a DSO of 49. The latest quarter saw the highest DSO in the company's public history, clocking in at 66 days. We think this is likely a negative for Palantir's business and, by extension, the stock.
The Bottom Line
Palantir appears to be at a pivotal moment--it has posted record revenues, but also record DSOs. It is now eligible to be included in the S&P 500, but it is unclear if the company will be allowed in, given that S&P had a long-running rule banning the inclusion of companies with a dual stock structure. While that rule was effectively dropped, it may be that the S&P retains a preference for single-class stock companies. At any rate, we believe the upcoming two quarters will be of great interest to Palantir watchers--bulls and bears alike.
For further details see:
This Is What's Going On With Palantir Stock