Companies can go through enormous gyrations to go public, only to find that that's just the start of their challenges.
Such is the case with a once-hot software play, Real Money Columnist Brad Ginesin notes.
“The stock of Palantir Technologies has been on some crazy ride since the provider of data analytics software came public in September 2020,” Ginesin wrote on Real Money after the company's last financial results.. “It opened around $10 and in a few months soared to a high close to $50. More recently, the shares are back around $10 after its fourth-quarter results knocked the stock to a 52-week low.”
At first glance, Palantir’s headline growth numbers looked solid, with revenue up 34%. But a look under the surface left Ginesin feeling cautious.
“An old trick that some corporations have pulled on Wall Street is to fund small companies that in turn buy the investing company's products,” Ginesin said. “The method will supercharge revenue growth on the surface, but when one digs deeper the company has merely turned "strategic investing" into revenue.”
Over the past year, Palantir has implemented a strategy to diversify sales away from government customers, its primary revenue source. Palantir has aggressively invested in the PIPEs (private investment in public equity) of SPAC deal target companies while simultaneously signing software contracts.
"Perhaps Palantir management envisioned a virtuous circle: Invest cheaply as companies de-SPAC; sell software to these emerging growth companies with newfound windfalls of SPAC capital; earn cash flow to invest in more SPAC deals; then, finally, Wall Street applauds growth with a top-dollar valuation," Ginesin wrote. "Instead, Palantir is losing investment dollars while Wall Street discounts this incestuously earned revenue and finds far less growth under the hood."
How would Palantir's growth look without this SPAC revenue?
Once the corporate selling SPAC strategy was stripped out, Palantir's overall revenue grew 26% year over year instead of the 34% reported. Reported bookings fell 6% year over year but declined 31% without the attribution of strategic investment booking. A remarkable 27% of bookings were the result of SPAC deals.
Maybe that’s why the company’s stock is down 40% this year.
“Palantir's strategic investments, meant to increase non-government revenue, are a questionable and costly experiment,” Ginesin noted. “The stock lacks valuation support while business momentum slows, leaving room for Palantir's shares to fall further.”
In the end, “investors would be wise to stay on the sidelines.”