1 Reason Why I'm Staying Away From Palantir Technologies (NYSE: PLTR) For Now
Palantir Technologies (NYSE: PLTR) is a data analysis software outfit that’s popular among growth investors.
The company counts big names such as the US Department of Defense, US Army, and US Food and Drug Administration as some of its customers.
Since going public in September last year, Palantir’s share price has more than doubled.
Despite the company’s popularity, I’m staying away from the stock for one simple, yet important, reason.
Strong Revenue Growth, But…
Palantir has seen solid revenue growth in the past.
According to its SEC Form S-1 filing, Palantir’s top-line grew from US$595.4 million in 2018 to US$742.6 million in 2019, up 25%.
For the full year 2020, which was just announced, revenue crossed the US$1 billion mark to US$1.09 billion, increasing at a faster clip of 47% year-on-year.
For 2021, Palantir expects revenue to grow greater than 30% year-on-year and for the first quarter of 2021, sales to increase by 45%.
Revenue growth looks exciting still for the upcoming quarter(s).
However, I’m cautious about Palantir’s customer concentration.
For the years ended 31 December 2018 and 2019, Palantir’s top three customers accounted for 33% and 28% of revenue respectively.
The data for 2020 is not out yet, but customer concentration is still likely to be high, although it could have fallen from last year’s level.
Increasing Pie Size From Existing Customers
A major part of Palantir’s growth strategy is to increase the size and number of deployments of its existing customers.
But this might further exacerbate the customer concentration risk.
And this strategy is not without risks. Palantir warned in its IPO prospectus (emphases are mine):
“Certain of our customers, including customers that represent a significant portion of our business, have in the past reduced their spend with us or terminated their agreements with us, which has reduced our anticipated future payments or revenue from these customers, and which has required us to refund some previously paid amounts to these customers. It is not possible for us to predict the future level of demand from our larger customers for our platforms and applications.”
If any of Palantir’s major customers pull out for any reason (including political ones), Palantir’s business is likely to be harmed.
Also, when a customer makes up a large share of Palantir’s business, the company could be at the mercy of the customer. This customer can wield its bargaining power and possibly drive down contract prices, ultimately affecting Palantir’s revenue.
When it comes to investing, no matter how sexy the business story is, I prefer companies with a diversified customer base to mitigate any customer concentration risk.
So for now, unless Palantir brings in a larger pool of customers and drives down its customer concentration risk drastically, I’ll watch it from the sidelines.
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Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock. The writer may have a vested interest in the companies mentioned. Image credit: Google Finance.