Palantir (PLTR) Has a Solid Bullish Narrative, and Yet a Bull Trap May Lurk In the Immediate Aftermath of Next Week’s “Double Click” Event
Palantir (NYSE:PLTR), a big data analytics firm that has the potential of turning into a mainstream provider of Software-as-a-Service (SaaS), is experiencing heightened volatility in the run-up to the next week’s much-anticipated “Double Click” event, thereby increasing the likelihood of a bull trap.
As an illustration of the recent weakness in Palantir shares, the stock price has declined by over 33 percent since hitting an all-time high close of $35.18 on the 29th of January 2021. At the heart of this recent tug-of-war between the bulls and the bears lies the inherent skepticism as to the company’s ability to market its products to a wider swathe of clients. The bears believe that Palantir’s products are too specific for wider adoption. The bulls, on the other hand, naturally disagree.
As a refresher, Palantir currently has three main products. Its Gotham service integrates and transforms data, regardless of type or volume, into a single, coherent data asset. Moreover, the company’s Foundry service removes the barriers between back-end data management and front-end data analysis, thereby offering an integrated approach to interpreting vast data sets. Finally, the Apollo software solution powers Palantir’s Gotham and Foundry SaaS services in the cloud.
It is, of course, Palantir’s Foundry service that is the current center of attention. To wit, at its “Double Click” event next Wednesday, Palantir is expected to showcase industrial applications of its Foundry service for automotive, distribution, heavy manufacturing, chemicals, utilities, and other industries. Palantir engineers will showcase the product’s capabilities related to chained model simulations, optimized query executions and analytical computations, and, finally, the Foundry’s unique ability to access data in an optimized form without the associated high-performance storage costs – where the data is stored in an optimized format in order to be readily available for queries.
This brings us to the crux of the matter. Given the prevailing high-volatility regime in Palantir shares, we believe that the stock is currently at risk of a bull trap event – where the stock price declines due to a false bullish signal. The market's uncertainty regarding Palantir’s ability to mass-market its products makes a sustained bull run difficult until the company is able to definitively demonstrate its offerings’ wide appeal.
The good news is that Palantir seems to be on the right trajectory. After all, it has signed a series of high-profile deals recently, including an $89.9 million contract from the National Nuclear Security Administration (NNSA), and partnerships with 3M (NYSE:MMM), BP (NYSE:BP), etc. However, it is Palantir’s recently announced partnership with IBM (NYSE:IBM) that is of most interest. The partnership aims to leverage the capabilities of Palantir’s Foundry service and integrate it with various cloud-based IBM products in order to simplify the construction and deployment of “AI-infused applications” for the wider market.
Apart from demonstrating the mass-market appeal of its products, Palantir needs to turn a profit. Here again, there is good news. While delving into the company’s most recently announced financial result, pertaining to Q4 2020, Palantir would have shown a profit if one were to exclude the impact of stock-based compensation. While Palantir's stock-based compensations are expected to swell in the coming quarters, so is its revenue. As an illustration, the company now expects year-over-year revenue growth of 45 percent in Q1 2021. Consequently, I’m confident that Palantir will be on a solid financial footing by the end of this year.
Another factor that strengthens Palantir’s bullish case is the stock’s growing profile within Cathie Wood’s ARK Invest ETFs. Cumulatively, ARK now owns over 18 million Palantir shares. This, of course, bodes well for the stock’s long-term prospects.