Companies can go through tremendous swings to go public, only to find that it’s just the beginning of their challenges.
Such is the case with a once hot software game, notes Real Money columnist Brad Ginesin.
Ginesin follows Palantirs (PLTR) – Get Class A Report from Palantir Technologies Inc Stock Story from the start – and watching it doesn’t get any easier.
“Palantir Technologies stock has had a crazy ride since the data analytics software provider went public in September 2020,” Ginesin wrote to a high near $50 on Real Money following the company’s latest financial results. More recently, shares are back around $10 after fourth-quarter results plunged the stock to a 52-week low.”
At first glance, Palantir’s growth numbers looked solid, with sales up 34%. But looking beneath the surface made Ginesin wary.
“An old trick some Wall Street companies have used is to fund small companies, which in turn buy the investing company’s products,” Ginesin said. “The method will accelerate revenue growth on the surface, but if you dig deeper, the company has merely turned ‘strategic investments’ into revenue.”
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Over the past year, Palantir has implemented a strategy to diversify revenue away from government customers, its main source of revenue. Palantir has aggressively invested in the PIPEs (Private Investment in Public Equity) of SPAC deal target companies while simultaneously signing software deals.
“Perhaps Palantir management has come up with a virtuous cycle: Invest cheaply when companies exit their SPAC; sell software to these emerging growth companies with newfound SPAC capital; earn cash flow to invest in more SPAC deals; then Wall Street eventually lauds growth a top-dollar valuation,” Ginesin wrote. “Instead, Palantir loses investment money while Wall Street discounts that incestuously earned revenue and finds far less growth under the hood.”
What would Palantir’s growth look like without this SPAC revenue?
After eliminating the SPAC corporate sales strategy, Palantir’s overall sales increased 26% year over year, versus the reported 34%. Reported bookings were down 6% year over year, but were down 31% excluding strategic investment bookings. A whopping 27% of bookings came from SPAC deals.
Perhaps that’s why the company’s stock is down 40% this year.
“Palantir’s strategic investments aimed at increasing non-government revenues are a questionable and costly experiment,” Ginesin noted. “The stock lacks valuation support as business momentum slows, leaving room for further declines in Palantir shares.”
In the end, “investors would do well to stay on the sidelines.”
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