Palantir’s business results were strong in Q2, but there may be trouble on the horizon.

Data analysis specialist Palantir ( PLTR 0.62%), a former meme stock, has fallen on hard times. Once, it traded for nearly $40; now, it sits around $8, about 80% off from its all-time high. However, the stock’s average Wall Street analyst price target is $10.28, a 26.5% upside from today’s prices.

Are these analysts correct in their thinking about this tech stock? Or will there be more pain ahead for Palantir? Let’s dig in and find out. A transition from government to the public

Palantir’s platform is used by businesses and governments to process massive amounts of data and pinpoint trends to guide decisions. In fact, its namesake was derived from the Palantir seeing stones from The Lord of the Rings book and movies, which give its users the ability to see all. Originally, Palantir’s software was only used by government agencies (like the FBI, CIA, and NSA) and reportedly helped pinpoint Osama bin Laden’s hideout — although these reports were neither confirmed nor denied by Palantir.

Now, Palantir is bringing its software to the civilian market, giving businesses the same tools the government uses to process data and make intelligent business decisions like understanding supply chain vulnerabilities. For example, clients can run simulations to understand how a change in the supply chain would impact the entire business using a digital twin. This use is just one example of the many capabilities of Palantir’s software, but the bottom line is Palantir processes data to provide actionable insights to its customers.

However, this capability doesn’t come cheap. Palantir’s Foundry software, its flagship software that processes data and drives decisions, costs users about $1 million per month through the Amazon Web Service’s cloud marketplace. Now, this price isn’t fixed, as customers could opt for on-premise plans of other subscriptions, but it gives you an idea of the high price Palantir charges for its services.

Because of its high price, contracts tend to be lumpy from month to month, which affects Palantir’s quarterly results. Future deals aren’t generating much growth

As you can expect, there aren’t many customers that can fork over that kind of money consistently, which is why Palantir’s customer count is only 304, although this is up from 169 just last year. It also closed 234 deals in the quarter, up 67% year over year. However, these deals didn’t add much to its total remaining deal value metric, as it only rose 4% year over year to $3.5 billion.

What does this mean? Although Palantir may be signing more deals, these customers aren’t expanding their future contracts.

This action is why present revenue growth isn’t terrible, as revenue rose 26% year over year to $473 million in the second quarter. Palantir is recognizing its old contract deals (which contributes to growth) but only maintaining its future deal dollar value (causing growth to stagnate). That’s not a good sign for investors, and it’s something to keep an eye on.

However, that trend could be a sign of the economic environment the U.S. is currently in. Palantir has likely neared its market opportunity for government contracts, and businesses aren’t willing to spend millions of dollars on new data analytics software until the economic outlook improves. As a result, Palantir’s future contracts only maintain what business they’ve earned.

This activity may be tolerable if the company is highly profitable, but Palantir isn’t. Instead, it lost $179 million in Q2 against revenue of $473 million. Nearly all of the loss can be attributed to Palantir’s $146 million stock-based compensation bill, but this number is significantly down from last year’s $233 million bill. What should investors do about Palantir?

So if I blindly approached you with an investment opportunity for a company that is growing revenue now but will likely be flat in a few years, plus it’s highly unprofitable, would you be interested?

If you instantly said yes or no, you forget one key piece: the valuation. Even the worst (or best) performing companies can be bargains if they are scooped up at the right price.

However, Palantir still trades for about 8.6 times sales , not a low price. As a quick illustration, even if Palantir could snap its fingers and have a 20% profit margin, it would trade for 43 times earnings — which is still expensive.

But the reality is Palantir is nowhere near that level of profitability, and with slowing sales, it may not reach it for some time without significant business changes. So while […]

source Wall Street Thinks Palantir’s Stock Has 26% Upside. Should You Buy?

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