Palantir Stock Down 9% in January – Time to Buy PLTR Stock?

The price of Palantir stock has kept declining in January following the weakness that started back in November when the company reported its financial results covering the third quarter of the 2021 fiscal year.

This sustained drop has taken place despite the firm announcing either the beginning or continuation of multiple deals with large companies.

On 20 December, Palantir announced that it partnered with Dewpoint Therapeutics to provide them with access to the Foundry platform for the development of treatments and cures for a wide range of diseases.

Meanwhile, on 5 January, Palantir informed that it will be expanding its operations to South Korea on the back of a collaboration with Hyundai Heavy Industries (HHI) as part of a deal that seeks to establish a big data platform to power the client’s core business.

“We expect that this partnership with Palantir Technologies will substantially improve the competitiveness of core businesses of the Group. It will be an important turning point in innovation of organizational culture that changes the way we work using data.”. stated Kisun Chung, the Chief Executive of Hyundai Industries Holdings, in regards to the deal.

Another factor that has been influencing the price action for Palantir stock has been a steady rise in US Treasury Yields. The yield of the 10-year US Treasury Note has climbed to 1.8% multiple times this month while it stands at 1.76% this morning.

These levels are the highest since the pandemic started and reflect how concerned market participants are about the accelerated pace at which the country’s inflation rate is increasing along with the Federal Reserve’s upcoming policy changes.

For companies with relatively weak financials such as Palantir, an increase in interest rates typically leads to a deterioration in their valuation as the market demands a higher return to justify the risk assumed.

What could be expected from Palantir in the future? In this article, I’ll be assessing the price action and fundamentals of this big data stock to outline plausible scenarios for the future.

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Palantir Stock – Technical Analysis

The past few days have been quite relevant for Palantir stock from a technical perspective as the price broke below the $17 support area that I highlighted in my latest article about PLTR.

This break may result in a continuation of the downtrend that the stock has experienced since November and reflects the market’s current risk-off attitude toward businesses with weak profit-generation capacity.

Yesterday’s stock trading session was interesting as trading volumes exceeded the 10-day average by more than 2 times. Even though the stock ended the day with a mild 0.4% loss, it shed more than 7% of its value at some point during the session.

This strong intraday recovery could mean two things. First, short sellers may have jumped on the stock causing the initial intraday downtick but then got squeezed. If this is the case, the impact on the short-term outlook for the stock might not be relevant and the trend would continue to point downwards.

On the other hand, it could also be that buyers are showing up at this price point as they believe the stock is trading at an attractive price. Depending on who is behind this buying spree, this could mark a near-term bottom if a deep-pocketed investor is stepping in to buy the dip.

Depending on what the price does in the following days, one of these two scenarios might be confirmed. For now, the outlook remains bearish and the mid-tern target of $10 per share I set forth in my previous article remains unchanged amid this break below the $17 threshold.

Momentum indicators are favoring this outlook as the MACD just crossed below the signal line and is being accompanied by negative histogram readings while the Relative Strength Index (RSI) remains heavily depressed at 30.

Palantir Stock – Fundamental Analysis

Palantir is now trading more than 40% below its September post-squeeze high and this calls for a revision of the firm’s valuation from a fundamental perspective to see if this could be an opportunity to buy a promising business at a decent price.

The company’s Chief Executive has maintained that Palantir should grow its revenues at a rate of at least 30% per year until 2025. For the entire 2021 fiscal year, the company expects to generate around $400 million in free cash flows on revenues of $1.53 billion resulting in an FCF margin of 26%.

If we take the word of Mr. Karp for granted, if Palantir grows its top-line results by 30% in 2022 that means that revenues will land at nearly $2 billion and free cash flows – based on 2021’s margins – could stand at $520 million.

At a market capitalization of $33 billion, this results in a forward P/FCF ratio of 66x. This valuation ratio remains stretched and may only be justified if Palantir manages to keep expanding its profit margins in the following years.

Until there is more evidence that this is the direction that the company’s finances are taking, the fundamental picture keeps pointing to a potentially overvalued business and that creates room for further negative volatility in 2022 – especially if interest rates keep rising.

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