Software company Palantir Technologies (PLTR 1.40%) is arguably one of the most controversial stocks on the market. Investors either love or hate the company and aren't afraid to tell you about it.
So much noise can muddy the waters for investors who want to get to the company's core and determine whether the stock might fit in their portfolio. It's time to hear both arguments and let the facts talk.
Here is the case for and against Palantir stock and which side makes a more compelling case for long-term investors.
The bullish spin: Palantir is an ascending software juggernaut
Palantir operates several software platforms on which it can build custom software for government and commercial customers. Its software analyzes data to help improve operations, aid decision making, and identify trends and insights. You could think of it as an assistant working with an organization to make it smarter.
The company's roots go deep into the U.S. government, an early adopter. Today, government business (primarily in the U.S.) makes up more than half of what it does.
But its potential with commercial customers is Palantir's key to long-term growth. Data is becoming crucial to competing in the private sector, and its U.S. commercial customer count grew 50% year over year in the first quarter and another 35% in second. It still has just 161 U.S. commercial customers, so this growth story could be just starting.
Palantir released its Artificial Intelligence Platform (AIP) roughly 10 weeks ago, and management reported unprecedented interest in the product on its second-quarter earnings call. It also said that new deals from the second quarter spanned 30 industries, underlining how large the company's potential addressable market could be.
PLTR revenue (TTM) data by YCharts; TTM = trailing 12 months.
Palantir's financials are already strong and getting better. The business is doing $2 billion in trailing-12-month revenue, is profitable under generally accepted accounting principles, and generating nearly $400 million in free cash flow.
With more than $3 billion in cash and zero debt, the sky is the limit for this growing company, and it has the deep pockets to pursue any ventures it chooses.
The bearish spin: Palantir isn't working in its shareholders' best interests
Palantir seems to be on the right track, but a good company isn't always an excellent investment, and there are a few potential issues with the company.
First, its product is highly complex software. It won't be easy for most investors to fully grasp the company's business model and how it might compare to its competitors. You also won't get much visibility into Palantir's base of customers since they use the software for mostly internal applications.
Next, the company has issued a lot of stock-based compensation since going public. Paying employees in stock instead of cash improves cash flow but can lower the value of existing shares over time with dilution. For example, total revenue has grown by more than 126%, but revenue per share has only grown a total of 13% because outstanding shares increased by 35% during that time.
PLTR revenue (TTM) data by YCharts.
Additionally, Palantir's revenue growth rate has steadily declined from 52% year over year in the third quarter of 2020 to 13% in the second quarter of 2023. That said, management is guiding for 16% year-over-year revenue growth in the third quarter, so hopefully, that's the beginning of a prolonged acceleration. However, investors should monitor such a significant decline closely.
So, who wins?
Bulls and bears have legitimate points to argue, which is probably why Palantir has been such a polarizing stock during its time in the market. Ultimately, time will answer each side's questions and reveal how great the stock is for investors.
Valuation could be a major determining factor in the stock's performance in your portfolio. Today, shares trade at a forward price-to-earnings ratio of 69, and analysts believe earnings per share will grow by an average of 56% annually over the next three to five years. The resulting price/earnings-to-growth ratio of 1.2 signals that shares could be attractively priced for a long-term investor today.
