Could Palantir’s 10% Drop Be An Opportunity?

Without a question, Palantir has had a difficult start for December, falling substantially from its November highs. Is this a structural issue, or could the stock return to offer a solid opportunity?

Tiny Drop, Massive Rise

In the month to Monday, December 11, Palantir shares were down 9.7%, a conspicuous deviation from the market, which generally rose through that period. Typically, a drop of that size would be concerning for a stock, but given that Palantir is up over 177% so far this year, a fluctuation of that size isn't exactly out of the ordinary. The company has seen its stock gain as it rides the AI wave higher and would presumably continue to track gains in that region.

Stocks with such gains are vulnerable to take-profit moves, such as PSP exiting its stake in the company last Friday. The investment fund was looking to reposition itself in exposure to future gains in the AI space. But that doesn't mean investors are turning away. Notorious tech investment fund ARK halved its exposure to Palantir in February after the shares made large gains. But last week, ARK took advantage of the pullback in Palantir shares to buy up over $27 million in shares.

Commercially Sustainable

While investors bet on Palantir gaining as it takes advantage of AI to supercharge its data analytics, it still gets 60% of its revenue from government contracts. Analysts are worried that some of those contracts may not be renewed at the same value as next year, which could hurt the company's revenue prospects.

Palantir saw its sales increase 17% in its latest quarterly update and upgraded its guidance for the year. Where the company continues to impress, however, is on the bottom line. After delivering triple-digit EPS growth in each quarter of this year, the consensus of forecasts is for Palantir's bottom line to rise by 312% for the current year. Despite some financial institutions taking profits along the way, others seem quite eager to buy the dips, contributing to the company's high level of volatility. Of course, when the company's EPS is in the single digits, high growth percentages are not all that surprising. Mainly since it has been in the green for only four consecutive quarters, but in time, the bottom and top-line earnings would be expected to converge, and the company would have to see stronger growth in sales to sustain its EPS growth rate.

With that in mind, Palantir is expanding its commercial presence, where revenue is growing at 34% compared to 12% growth for government contracts. The company has so far released four AI-based products that are helping it expand into commercial contracts. While the growth rate in sales doesn't match the meteoric rise in share price, Palantir continues to expect strong growth that could sustain growing profits in the coming months.

Palantir

Technically, the share price has a lot of room to $30 via $23 and $27, but also little support on the way to $16.5. Pattern-wise, the stock appears in a medium-term range, pending a breakout above $22 or a breakdown of the $13.5 support towards $10. Right in the middle, the short-term price action may be a little uncertain, but the trend is held together while above the bottom of the channel.

Source: SpreadEx / Palantir Technologies

Key Takeaways

While Palantir's share price has recently dropped around 10%, the overall sentiment on the stock remains positive. The recent drop could be seen as an opportunity by investors. The company has seen strong revenue growth and EPS growth this year. However, some analysts are concerned that government contracts may not be renewed at the same value next year. Palantir is expanding its faster-growing commercial business, has launched new AI products to boost this segment, and expects to deliver profitable growth going forward.