When the Nasdaq index started losing around 2% intra-day late last week, investors should have expected Palantir’s (NYSE:PLTR) sharp drop would follow. PLTR stock cut through its key 50-day moving average, breaking an uptrend. PLTR has traded for just under 200 trading sessions so far, but also trades under its average for the full duration. What happened?
Palantir stock is a favorite trade of r/WallStreetBets. Other favorites such as GameStop (NYSE:GME) and Clover Health (NASDAQ:CLOV), just to name a few, also lost momentum. Palantir’s valuation historically weighed on shares. A recent insider lockup also pressured the stock, too.
Investors who bought Palantir shares at around $17.50 in May might have reacted to the stock falling to key moving averages. And while valuations like an over 33 times price-to-sales might justify the profit-taking, when is the stock a buy again? The company’s Chief Operating Officer, Shyam Sankar, said the meme stock popularity helped sales. As Reddit’s momentum buying slowed, the stock understandably began to underperform.
Contracts and Partnerships
The software firm announced a new partnership with DataRobot on June 24. The companies partnered to create a custom framework that will give customers “a more nimble strategy for demand forecasting.” The partnership aims to increase customer efficiency by cutting down the time on manual data cleansing and manual modeling. By helping companies save on operating costs, Palantir should drive sales.
Palantir won a contract with the Federal Aviation Administration. The company will help the FAA’s modernization objectives for aviation safety. It will monitor operational safety activities, such as the 737 MAX fleet’s return to service. The FAA will use Palantir’s Foundry product, allowing for integrating siloed data and facilitating data analysis through a central operating system for data.
Palantir’s contract win with the FAA is not a big moneymaker, though. The one-year contract has two additional option years valued at up to $18.4 million. With PLTR’s market capitalization at $41 billion, this revenue is a rounding error. Long-term investors are betting that small contracts become billion-dollar ones in the next decade. The company has a “long-tail” in revenue.
On June 8, the U.S. Centers for Disease Control and Prevention renewed its contract with Palantir for $7.4 million. Again, the size of the contract is almost not worth the time Palantir spent preparing the press release. Still, whenever it announces wins of any size, Fortune 500 companies will eventually notice. And Palantir needs to get those customers using its products. The ongoing Covid-19 pandemic suggests that the CDC will need Palantir’s solutions in the coming quarters. Revenue from the CDC will only grow from here.
Fair Value of PLTR Stock
Palantir does not yet enjoy a strong stock score
Only six analysts offer a price target on Palantir. The price target range is $17 to $30, with the average target at $22.33. Stock Rover is more cautious on Palantir’s stock, with a fair value of $18.36. The stock scores a 35/100 on value, which is based on metrics like price-to-earnings and price-to-sales. It scores a 41/100 on quality. The quality score depends on figures like gross margin, debt/equity, and return on invested capital.
Chart courtesy of Stock Rover
Palantir investors need to wait a few quarters before scores are in the green zone. Valuations are unfavorable while sentiment is negative. The stock’s recent drop hurt its positive momentum and sentiment score.
PLTR Stock in the Long Term
Palantir shares may have benefited from the meme hype in recent months. Fickle Reddit traders may have lost money on other momentum trades, forcing them to close their long position in Palantir.
Palantir’s press releases may have contracts that are too small to excite investors. This could lead to the market ignoring the stock. Readers will not know where the stock will head in the immediate future. When it reports quarterly earnings, a huge revenue beat may attract buyers once again.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.