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Palantir Technologies (PLTR 1.27%) stock has been on the decline since Jan. 3, 2022, the day the market peaked. Investors who have held on from that point are down 65% on their investment, according to data provided by S&P Global Market Intelligence.
Palantir has great technology and a promising business, but given the nature of the opportunity and the details of Palantir’s business, there’s reason for concern a rebound won’t happen fast.
Palantir was an investor darling when the company first went public in late 2020. The company provide data analytics tools for government and commercial customers, and it famously was credited with helping the U.S. government find Osama bin Laden in 2011. The stock jumped nearly 300% in its first few months on public markets, but has largely been on the way down since.
That decline accelerated in 2022, with Palantir shares losing more than half of their value. Part of the sell-off can be attributed to the broader macroeconomic trends that have put pressure on a wide range of growth stocks: With rates rising, expansion capital is getting more expensive, and investors have more options to generate returns, so interest in growth is waning. But some of the problem is specific to Palantir as well.
The company’s initial offering captured investor imagination, but also likely led to expectations that have proven to be impossible to live up to. Palantir is still largely a defense contractor, getting more than half of its revenue from U.S. and foreign government customers. Defense work, by its nature, is steady and predictable but also tends not to be fast-growing.
Palantir bulls had hoped that its growing commercial business would provide the growth spark needed. But this has been a tough environment in which to win new commercial contracts, with a wide range of companies complaining about delays in enterprise software procurement. Palantir also received criticism for investing in special purpose acquisition companies (SPACs), young companies that would turn around and sign deals to use Palantir software.
Palantir during 2022 scrapped its previous target for 30% sales growth well into the future, which decreased momentum around the stock. It also continues to lean heavily on stock-based compensation, a practice that has fallen out of favor as stock prices have declined.
It’s rare for a good, solid business to fall as much as Palantir did in 2022. This is, after all, a company with a strong product offering that is generating growth. Investors holding Palantir shares need not worry about the company blowing up or running into solvency issues.
However, there isn’t a lot to suggest those lofty expectations of early 2021 will return anytime soon. For all of the promise of Palantir’s tech, and the company’s efforts to boost the commercial business, there isn’t an obvious catalyst that would cause growth to accelerate in 2022.
And even after the decline, Palantir shares still aren’t cheap. The stock trades at 7 times sales. By comparison, defense IT specialist Booz Allen Hamilton trades at 1.5 times sales and commercial data analytics vendor Snowflake trades at 21 times sales. For now Palantir’s business more closely resembles Booz Allen Hamilton’s, and even if some premium is justified, it is hard to imagine Palantir being treated by the market like Snowflake anytime soon.
The most likely path forward for Palantir is to continue to ebb and flow for however long the current market malaise continues, and then slowly advance from there. For patient, long-term investors, this is still an investment that can pay off, but with each passing quarter it seems more apparent that payoff will take time.
Lou Whiteman has positions in Booz Allen Hamilton and Snowflake. The Motley Fool has positions in and recommends Palantir Technologies and Snowflake. The Motley Fool recommends Booz Allen Hamilton. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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