With No Clear Competitive Edge, Palantir Is Priced on Mere Hope

Stocks to sell

Before I buy the shares of any company, I generally need to know how and why the firm’s products and/or services will appeal to end-users more than those of its competitors. When it comes to Palantir (NYSE:PLTR) stock, though, the company seems to have chosen not to share important elements of that vital information. That’s one key reason why I believe that investors should sell PLTR stock.

Palantir Technologies (PLTR) headquarters

Source: Sundry Photography / Shutterstock.com

On the afternoon of March 24, I sent a brief e-mail to Palantir’s media liaison, asking only one question: “What differentiates Palantir’s technology/products from the technology/offerings of other data analysis vendors that also utilize AI?”

I still haven’t received any sort of answer.

I thought that perhaps the company did not want to answer me because I’ve been critical of PLTR stock, but after I saw a recent statement by one of the company’s biggest fans, ARK Invest fund manager Cathie Woods, I changed my view.

In Woods’ statement she appears to strongly suggest that she doesn’t know exactly why the company’s products appeal to its customers. I believe that no one on the Street may really know why Palantir’s technology is better than that of its competitors.

Wood presumably has a big, highly capable research staff and is very familiar with the company. Common sense suggests that if they don’t know the answer, retail investors probably have no idea either.

Palantir Keeps Its Advantages to Itself

In a February interview on CNBC, Wood said, “So we think in many ways…and [Palantir] won’t talk about how, but [it] is certainly garnering a lot of business, which tells us that they are, seeing in the future and investing in the future in ways that…increasingly companies are going to  need, especially as we’re competing against China.”

It’s not easy to understand the exact meaning of Wood’s statement, which seemed to be a mix of the present and the future. I’m pretty sure she was saying that many companies are buying Palantir’s products now because it’s making the necessary investments to improve its offerings while its products will become more necessary in the future.

Still, Wood appeared to tacitly admit that she doesn’t know why or how Palantir’s products will improve or meet future needs.

And her statement also suggests that she doesn’t know how or why Palantir’s technology is superior now. If Wood did know that, I think she would at least attempt to explain how its current, superior technology could evolve further to meet future needs.

A Few More Problems With the Bull Thesis

One issue with Wood’s statement is it appears not many companies are buying Palantir’s products. Specifically, according to Seeking Alpha columnist Bears of Wall Street, the company only has about 125 customers.

Meanwhile, as I pointed out in a previous column about PLTR stock, in the fourth quarter, the company’s total commercial revenue increased just 4% year-over-year.

For context, the 2020 sales of another maker of data-analysis products, Splunk (NASDAQ:SPLK), came in at $2.23 billion, roughly double Palantir’s $1.1 billion.

Those numbers suggest that Palantir’s products may not be as appealing to companies as Wood thinks, indicating her thesis about its offerings being the proverbial “wave of the future” could also be off-base.

Further, both Wood and Palantir’s CEO, Alex Karp, in recent weeks have repeatedly indicated that the company is unprofitable now because of its supposedly large investments in innovations and its long-term orientation. In 2020, Splunk spent nearly $620 million on research and development, versus Palantir’s $357 million. In Q4, Splunk spent $197.5 million on R&D, dwarfing Palantir’s $47.36 million of R&D outlays.

It’s true that, in  2020, Palantir spent about five percentage points more of its revenue than Splunk on R&D, but that trend actually reversed in a big way in Q4 as Palantir spent just 15% of its top line on R&D, versus Splunk’s 38%. In any case, I think it’s fair to say that Splunk is devoting more resources to R&D than Palantir.

The Bottom Line on PLTR Stock

I’m not saying that Palantir’s products aren’t very good or even excellent. No company can generate over $1 billion of annual sales without having top-notch products. I just think that it’s unclear if its products and services are superior to those of its competitors.

Moreover, the slow growth of its commercial business and its lack of profitability are worrisome. With PLTR stock trading for about 27 times analysts’ average 2021 sales estimate, those worrisome issues and the name’s large “known unknown” make the shares a sell.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

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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