Palantir was created in 2003 by software developer Palantir to assist in anti-terrorism operations. After achieving success, Palantir expanded its services to commercial clients.

Palantir was IPOed about a year ago. While the stock performed well, many investors remain skeptical of the future prospects.

The company’s growth is rapid, it has high-quality revenue, and the business model allows for great scaling, which results in incredible margins.

Palantir, on the other hand, remains unprofitable and is likely to continue diluting shareholders. Competition may soon catch up.

Palantir’s investment case is positive, in my eyes. This is why I believe the stock should be bought. (See Insiders’ Hot Stocks on TipRanks)

Bull Case

Palantir’s bull cases are built on the company’s ability to hyper-grow. The company’s revenues grew by 49% to $376million in Q2, while the Commercial segment grew 90%.

Palantir signs new multiyear contracts to increase its cash flow. The company concluded 62 deals exceeding $1 million. Of these, 31 were worth $5million or more and 21 are worth $10million or more.

These contracts are attractive because Palantir can enjoy recurring revenue through them. The company adds another source to revenue with each new client it signs. It also has the potential for a client to expand the contract later on, which could bring in more money.

Palantir is also able to source significant amounts from the U.S. government as well as its allies. This is what makes Palantir’s revenue truly exceptional. Palantir is not at risk of defaulting on defense contracts, which makes it virtually impossible to fail.

The revenues of Palantir are expected to grow rapidly going forward. Because Palantir is an industry leader, it’s not easy to get into this market.

Bear Case

Palantir investors are concerned about the negative aspects of this stock. First, bears will claim the company is still unprofitable. This is not a very clear statement.

The gross margins of the company are high at 75%. A significant portion of the company’s costs are used for future growth. Again, this is something that investors shouldn’t be concerned about. Palantir’s stock-based compensation is not the only thing that makes it unprofitable.

De facto, the adjusted operating income was $116.7 million even ignoring the $232.7million stock-based pay in Q2.

It would not be wrong to say that excessive stock-based competitiveness is reducing shareholder value at an alarming rate. It is possible that employees will eventually own more of the company, which could align their interests with those of shareholders.

Due to stock trading at a high valuation, at 25.3 times forwards sales, the company does not print additional stock cheaply. This is possible because of the premium valuation.

It is true, however that Palantir may be under threat from competition in the near future. Palantir could lose the lucrative agreement it had with Immigrations and Customs Enforcement to use an alternate tool.

But, such an emerging trend is not evident. Palantir should continue to have strong relations with governments.

Wall Street’s Take

Palantir Technologies (NYSE 🙂 currently has a Moderate sell consensus rating. This is based on three Sells in the last three months, one Hold, two Buys and two Holds. At $24.20, the average Palantir Technologies price target implies 2% upside potential.

Disclosure: At the time of publication Nikolaos Sismanis held a long-term position that was beneficial to Palantir Technologies via stock ownership.

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