In the realm of the Russell 1000, a select group finds itself facing the daunting label of “sell” from a significant portion of analysts. Palantir Technologies Inc. recently joined this group, as tenacious doubts persist.
Keith Weiss, an analyst at Morgan Stanley, downgraded Palantir shares (PLTR, -7.93%) from equal-weight to underweight on Thursday. In his assessment, while Palantir currently thrives on the promise of artificial intelligence (AI), it will encounter considerable hurdles in converting this potential into substantial revenue.
Palantir’s AI Journey: A Test of Patience
In the past six months, investors placed unwavering faith in Palantir’s ability to bring its products to market. However, Weiss anticipates a shift in focus towards discerning those companies that can effectively drive revenue from their AI offerings in a timely manner. According to Weiss, Palantir is yet to determine a monetization strategy for its solution, leaving them at an early stage.
A Soaring Valuation Amidst Uncertainty
Palantir’s current enterprise value stands at 14.6 times the estimated forward sales—significantly higher than the 5.1 times it held at the end of last year. Weiss opines that this valuation excessively reflects Palantir’s AI promise, while the company’s fundamentals are fundamentally mismatched.
As Palantir grapples with challenges on its AI journey, the road ahead will require a resilient approach and strategic rethinking. Only time will tell if they can transform their vision into tangible success.
See more: Palantir’s AI story will require patience, analysts say
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Palantir’s Second Half Outlook and Stock Analysis
Weiss, an expert in financial analysis, presents a challenging outlook for Palantir as they enter the second half of the year. According to Weiss, the company’s revenue guidance already implies an anticipated increase in organic revenue growth, excluding strategic investments and contributions from their joint venture in Japan. This higher expectation sets a demanding benchmark for positive estimate revisions that would justify Palantir’s valuation.
As a result of this analysis, Palantir shares experienced a significant decline of over 8% during Thursday morning trading, with their stock price dropping below $15. In conjunction with this downgrade, Weiss adjusted his price target for Palantir down to $9 from $8.
When considering the average price target of $13.73 from analysts tracked by FactSet, it becomes evident that this target falls approximately 8% below the current market levels. FactSet data reveals that out of the 18 analysts covering Palantir’s stock, three have buy ratings, six have hold ratings, and nine have sell ratings.
Looking back at Palantir’s performance since 2018, their sales have achieved an impressive compound annual growth rate of 33.8%, as reported by FactSet. Among the companies in the Russell 1000 RUI index with available data, Palantir ranks 20th out of 64. Furthermore, estimates indicate that Palantir’s sales compound annual growth rate from calendar years 2023 to 2025 is expected to be around 18.8%, placing them at the 26th position out of the 76 companies that have such estimates.
Although Palantir is not currently a member of the S&P 500 SPX index, they have set their sights on inclusion in the future. This goal would require the company to achieve GAAP earnings over the past 12 months and demonstrate GAAP profitability in the most recent quarter. Palantir has managed to generate a small GAAP profit in each of the last three quarters, inching them closer to meeting the criteria for S&P 500 inclusion.
Despite facing challenges, Palantir’s shares have experienced remarkable growth, surging by an astonishing 133% since the beginning of this year.
Philip Van Doorn contributed
