Why the Palantir share price surged 87% in the last month

Following a relatively subdued period which saw Palantir Technologies (NYSE: PLTR) trade sideways following its IPO – the stock has surged over the last 30-days, as optimism around the big data company improves.

Between September 30 and October 19 PLTR traded from $9.50 to $9.57. In the last month, that picture has wildly reversed, with the stock up 87% since October 17, finishing out Thursday’s session at $17.90.

The initial sideways activity may have been a result of a few things: worries around a concentrated customer base, concerns over revenue deceleration, or a general aversion to Palantir’s business.

Speaking of the revenue outlook, in October, Palantir had guided for full-year FY20 revenues of between $1,050-1,060 million, implying a year-over-year growth rate of between 41-43%; while non-GAAP operating income was expected to come in at between $116-126 million.

The company also said it expected to record a revenue growth rate in excess of 30% in FY21. Off the back of this, as one Seeking Alpha contributor wrote in early October:

‘Given the weak guidance and its significant impact on growth prospects, I am turning bearish on Palantir as its shares are too expensive at this point.’

If the narrative around decelerating revenue growth contributed to a bearish atmosphere around the stock last month, this month, that mood looks to have shifted dramatically – with the company raising its full-year revenue guidance as part of its third quarter earnings report, released on November 12.

Looking at the headline results of the Q3, the company said it generated $289.4 million in quarterly revenue, implying a year-over-year gain of 52%.

'The demand for our software has increased steadily over the past year in the face of significant economic and geopolitical uncertainty in the United States and abroad,’ the company stated.

On top of improved revenue growth, Palantir reported good deal flow during the quarter, closing 15 deals in Q3, amongst new and existing customers.

The most significant of these included a $300 million, five year contract with 'one of the world's largest aerospace companies'. This contract represents Palantir’s largest commercial contract in its history, underscoring the recent momentum the company has witnessed in the commercial sector.

One key issue that investors may have considered as a key overhang for the stock is the concentration of Palantir’s customer base. Indeed, at the time of the IPO, Palantir reported that it had just 125 customers, with more than two-thirds (61%) of its revenues derived from its top 20 customers.

As the Washington Post rightfully put it, this may be perceived as an issue, as ‘it could lose business as long-running government contracts are renegotiated.’

So far Palantir has actually seen a trend towards de-concentration: That 61% figure cited above – true as of the nine months ending September 30, is down from 68% for the nine months ending September 30, in FY19.

Will that trend continue to move lower? Only time will tell.

Despite concerns around the renegotiation of contracts and momentum in the commercial sector, management said that the company remains primarily focused on growing its government contract base. On this front, the pandemic has acted as a favourable tailwind for the company.

'Our work with healthcare organisations across the federal government has accelerated this year, as we continue to expand our reach with the nation's defence and intelligence agencies, including the U.S. Army, Navy and Air Force.'

'Our work with partners across the U.S. federal government in responding to the coronavirus pandemic has increased significantly in recent months.’

Palantir said it now expected full-year (FY20) revenue to come in at between $1.070-1.072 billion, implying a growth rate of 44%; while non-GAAP operating income is now expected to come in at the range of between $130-136 million.

The above-discussed coronavirus tailwinds in addition to the guidance upgrade both likely contributed to the improved mood around PLTR in the last month.

The company also reiterated its expectation of a FY21 revenue growth rate in excess of 30% as part of its Q3 release.

Palantir share price: Analysts say ‘Hold’

Analysts at Jefferies Financial Group remain the biggest Palantir bulls on the Street, raising their price target from $13 to $18 and maintaining their Buy rating in the wake of the Q3.

Despite Palantir’s stellar run over the last month, the investment bank noted that there remains ‘room for further upside, driven by a combination of estimated revisions and more incremental multiple expansion' – via Bloomberg.

With a current market capitalisation of $31.18 billion and on the company’s own FY20 revenue estimates, PLTR trades on a FY20e price-to-sales ratio of ~29x.

While Jefferies analysts eye multiple expansion, Morgan Stanley analysts have grown more cautious following the Q3, lowering their rating from Overweight to Equal Weight, while raising their price target from $13 to $15.

Citi analysts appeared to share similar concerns to Morgan Stanley, with the investment bank’s Tyler Radke retaining a Neutral rating and $10 price target on the big data company. Despite Palantir raising its guidance, Mr Radke said, ‘even applying a similar beat as we saw in Q3 would suggest a 15 point deceleration in revenue growth’ – via Barrons.

Beyond the market’s read on the Q3 and the sell-side’s reaction, a vote of confidence from legendary trader Steven Cohen might have contributed to Palantir’s recent share price spike, with Bloomberg running a story titled Palantir Rallies After Steve Cohen’s Point72 Snaps Up Shares.

According to regulatory filings, Cohen’s Point72 Asset Management snapped up 29.9 million shares of the big data company during the September quarter.

Analysts have a Hold rating on PLTR, on average, according to MarketWatch.

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