France Challenges Palantir, Market Reacts.

France has decided that Palantir’s solutions, used among others by the French domestic intelligence service DGSI, will be replaced in the future with domestic solutions.

PLTR.US chart (D1)

This is not the only factor, but it is the main driver behind the decline in Palantir, which is down about 8% in Tuesday’s session. The stock is now 40% below its peak.

A dangerous precedent

For the company, this news is very unfavorable, not because a single French agency intends to stop using its solutions. The valuation problem is twofold:

• First, this is one of the first major and significant steps aimed at making European security independent of American digital solutions. The specific case of France and Palantir shows that even in areas where the “moat” and barriers to entry are enormous, the government does not hesitate to take on the risk and costs of switching to its own solutions. Given the company’s controversial nature and the increasingly less trusted foreign policy of the US, France could become the leader that pulls the rest of Europe into a process of moving away from the company’s solutions, and such a development would be devastating for valuations.
• Second, the company meant to replace Palantir is ChapsVision, a fast growing firm with an impressive range of solutions, yet it still lags far behind Palantir in most financial metrics. If ChapsVision were able to deliver a solution meeting DGSI standards, it would be a clear signal that the prices and margins Palantir enjoys are not justified.

Adding fuel to the fire

• This news hit at a very fragile sentiment among the company’s investors. Cleveland Research published a report with a clearly negative tone for the company’s valuation, pointing to “below expectations” sentiment among the company’s partners.
• In addition, Michael Burry once again, along with a number of other analysts, also spoke negatively about the company, pointing for example to an unsustainable growth rate and valuation multiples.
• Investor confidence is not helped by the fact that members of the company’s management are selling large volumes of shares just ahead of earnings. It is worth noting that this is not the first time, and such selling has not always preceded declines, but it is hard to avoid tough questions.
• Sentiment is not uniform, however. Analysts at Oppenheimer and Baird remain outspokenly confident in their bullish theses for the company.

Market context

All of this news is problematic and materially affects the share price. Hanging over the entire market is the Fed meeting, which has become an unknown since K. Warsh took the chair.

Palantir is a company that is exceptionally sensitive to fragile sentiment due to extreme valuation metrics. With multiples as high as Palantir’s, even small downward revisions or disappointments lead to crushing sell offs, because a small move today has a huge impact on the company’s target value.
The company will publish its results on August 3, after the close of trading on Wall Street.

• The market expects EPS to rise to $0.34 and revenue of $18.1 billion.
• Margins, customer mix, and guidance for the next quarters will also be key.