It’s Time for Long-Term Investors to Bail on Palantir Stock

Stocks to sell

One of my main concerns about Palantir (NYSE: PLTR) stock has been somewhat addressed, at least for the time being. My other major concern about the company is still very much in play.

Source: Ascannio /

I’m no longer extremely worried about the company’s growth in the wake of Palantir’s first-quarter results, but I’m still very much concerned about its profitability in general and its stock-based compensation in particular.

As InvestorPlace columnist Tezcan Gecgil noted in her recent story, Palantir’s overall top line jumped 49% versus the same period a year earlier, reaching $341 million.

Meanwhile, she observes, the company’s commercial revenue was up grew 72% year-over-year, while its U.S. government revenue grew 83%.

I’m less concerned than I had been about the outlook of Palantir’s U.S. commercial and U.S. government businesses but think it’s important to keep context in mind.

In the second half of Q1 of 2020, the novel-coronavirus pandemic was becoming a major concern for American businesses, causing many of them to cut their IT spending. As a result, some of the year-over-year gain in Palantir’s U.S. revenue may reflect an easy comparison, rather than true advancements by its business.

A Closer Look at PLTR Stock

The Biden administration was still very new and had many more pressing priorities than taking a deep dive into IT contracts, including those with Palantir, in the fist quorter of this year.

I would not be at all surprised if the growth of the company’s U.S. government business greatly slowed in the second half of the year.

Palantir’s official bottom line came in at -$123.47 million. But it reported “adjusted” earnings per share of positive 4 cents and “adjusted” free cash flow of positive $151 million.

Much of the discrepancies among the company’s large official net loss, its positive “adjusted” EPS and its rather significant “adjusted” free cash flow were caused by its staggering level of stock-based compensation.

Specifically, its stock-based compensation last quarter came in at $193.7 million, nearly four times as high as the $54 million of stock-based compensation it doled out during the same period a year earlier. If this compensation is included in the calculation of the company’s margin, the profit margin of its business operations is a dismal -33%.

Including stock-based compensation, Palantir’s sales and marketing costs last quarter surged to $57.3 million  versus $18.46 million during the same period a year earlier, while its R&D and general/administrative expenses soared to $37.87 million and $82.59 million from $15.03 million and $12.54 million, respectively.

Stock-Based Compensation Totals

It’s clear that Palantir is paying for humongous increases in its costs with tens of millions shares of PLTR stock. From the point of view of shareholders, there are multiple problems with this situation.

First of all, if Palantir’s products and the insights they provide are as unique and valuable as the company says they are, then why can’t it raise its prices to make ends meet, rather than using  so many shares of its stock?

Secondly, and much more obviously, the use of so many shares puts tremendous downward pressure on PLTR stock because many of the shares will be immediately sold on the open market.

Thirdly, I’m concerned that a negative cycle could be created by the company’s dependency on stock-based compensation. As the company’s use of its shares makes its stock less valuable, it will have to use more to pay the same bills, restarting the negative circle.

Palantir could be generating huge revenue increases primarily by charging low prices for its services and trying to hide its resulting losses by using stock-based compensation. Over the longer run, that trend seems unsustainable.

At the very least it can only be sustained over the long-run by issuing more shares, badly hurting Palantir’s shareholders in the process.

The Bottom Line on PLTR Stock

I’m less worried about Palantir’s growth now, but I don’t think it’s totally “home-free” in that area. Further, because I remain concerned about the company’s overreliance on stock-based compensation, I recommend that longer-term investors sell the shares.

On the date of publication, Larry Ramer 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 Publishing Guidelines.

Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015.  Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.

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