(Bloomberg) — Palantir Technologies Inc.’s premium valuation (PLTR) will be put to the test when the data analytics and software company reports results after the market closes on Monday.
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After a blistering AI-powered rally of more than 140% this year, the bar is high. Wall Street has become increasingly cautious on Palantir, with the average target implying a decline of more than 30% over the next twelve months. At the same time, investors are still wary of AI-linked names and want to see more tangible results from the emerging technology. The profits of Amazon.com Inc., Microsoft Corp., Meta Platforms Inc. and Apple Inc. received mixed reactions.
“We cannot rationalize why Palantir is the most expensive name in software,” RBC analysts led by Rishi Jaluria wrote in a note last week. The stock trades at more than 100 times forward earnings, while Oracle Corp. and Microsoft both trade at less than 30 times.
“Without a substantial beat-and-raise quarter to elevate the near-term growth trajectory, the valuation appears unsustainable,” Jaluria said. RBC has an underperform rating and a $9 price target for Palantir – about 80% lower than the current price.
Bullish investors see it differently and helped push the stock to a record high last month. The company, which gets just over half of its revenue from government contracts, got a boost from its recent inclusion in the S&P 500 and is now the third-best performer in that benchmark in 2024 – behind only Vistra Corp. and Nvidia Corp. (NVDA).
Palantir is “one of the few companies supporting Gen AI that has actually seen a resurgence in both the corporate and government sectors,” said Ted Mortonson, managing director at Robert W Baird & Co. “The Street, to be honest, is just lacking. how powerful their core AI-based platform is.”
Palantir is expected to report adjusted earnings per share of 9 cents in the third quarter, up 29% from a year ago but a slower pace of growth than in previous quarters, according to data compiled by Bloomberg. Revenue is estimated at approximately $704 million, up 26% year over year.
Investors will mainly focus on adding customers and selling AI tools to enterprise customers. Wall Street estimates that government customer revenues will grow 23% to nearly $379 million, while commercial sales are expected to rise about 32% to $330 million. Palantir has won several new enterprise customers this year, including CBS Broadcasting, General Mills Inc. and Aramark Services Inc.
“We need to continue to see that momentum,” Mortonson said, in commercial contracts.
Joe Tigay, portfolio manager at Equity Armor Investments LLC, also focuses on this metric. “They have contracts with very big names, but they are just scratching the surface in terms of the kind of customers they can reach,” he said.
RBC’s Jaluria, on the other hand, is skeptical about the extent to which Palantir can keep up with profits in the commercial sector, given the high level of competition and given the suitability of Palantir’s products outside large, non-tech companies.
The RBC analysts also note that Palantir’s rally has been helped by a large segment of retail investors — a crowd that could quickly sour the stock, especially if the company doesn’t start returning meaningful capital to investors. Palantir does not offer a dividend and had $973.3 million of a total authorized share repurchase program worth $1 billion available as of June 30.
“With Palantir’s cash balance of $4 billion, we think retail investors are starting to become (rightly) frustrated by the company’s lack of willingness to return capital to shareholders, as there is no clear interest in pursuing mergers and acquisitions” , Jaluria wrote.
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