Case Study: Palantir (PLTR) stock according to high performing analysts
Key Points
Performance
Palantir (PLTR) shares rose by 1.90% this week, pushing their year-to-date gains up to 135.05%. This compares favorably to both the S&P 500 and the Nasdaq Composite, which are up by 12.41% and 27.65%, respectively, on a year-to-date basis.
Event & Impact
Bullish sentiment continues to push stocks with artificial intelligence tailwinds higher. Palantir is benefitting from this trend due to its strength with enterprise software and long-standing relationships with various segments of the U.S. government.
Noteworthy News:
This week, PLTR signed a $463 million contract with the U.S. Special Operations Command centered around AI. This continues the trend of PLTR winning large-scale AI-driven contracts, which is bolstering the stock’s year-to-date rally.
Nobias Insights
57% of recent articles published by credible authors focused on PLTR shares offer a “bullish” bias. The one credible Wall Street analyst who covers Palantir believes that shares are likely to fall in value. The price target being applied to PLTR by this credible analyst is $7.00, which implies a downside potential of approximately 53% relative to the stock’s current share price of $15.02.
Bullish Take 5-star rated author, The Value Portfolio, said, “At a 2% FCF yield with a double-digit growth rate, Palantir Technologies Inc. has the ability to continue growing. It has no debt and a strong net cash position which means profits can be rapidly directed to shareholders. Putting all of this together, Palantir is a valuable long-term investment that can drive substantial returns.”
Bearish Take Michel Cohen, a Nobias 4-star rated author, stated, “The Bear Cave alleges that Palantir inflates its financial metrics through certain practices, like investing in companies and then requiring those companies to buy Palantir products. It reportedly invested about $400 million across 20 SPAC mergers, with those companies then purchasing at least $700 million in Palantir software.”
PLTR Jun 2023
Artificial Intelligence has been one of the major driving forces of the broad market rally - and especially the tech-heavy Nasdaq’s outperformance—that we’ve seen throughout 2023 thus far. This year, the S&P 500 is up by 12.41% and the Nasdaq has risen by 27.65%.
Still, investors are looking for the next big secular growth trend to latch onto and the fervor behind artificial intelligence has ramped up recently, largely on the back of Nvidia's stellar Q1 earnings report. Nvidia shares are up by 170.3% on a year-to-date basis and bullish sentiment has increased for other names in the semiconductor and software industries that deal with artificial intelligence.
Another stock that has been a beneficiary of this bullish trend is Palantir Technologies (PLTR) which is up by 68.4% during the last month alone. Palantir’s recent rally has pushed its year-to-date gains into the triple digits as well. PLTR shares are up by 135.05% during 2023 thus far.
Yet, when looking at the reports by the credible authors and analysts that the Nobias algorithm tracks who cover PLTR shares, there is a major divergence in sentiment surrounding this stock. 57% of recent articles published by credible authors on PLTR stock have expressed a “Bullish” bias; however, the lone credible Wall Street analyst that Nobias tracks who has offered an opinion on PLTR shares believes that they’re likely to experience a significant sell-off.
Bullish Nobias Credible Opinions:
The most recent bullish report that a credible Nobias author has published on PLTR was by Nobias 5-star rated author, The Value Portfolio. In their June 7th article on Seeking Alpha, The Value Portfolio highlighted the company’s AI-driven growth.
The Value Portfolio said, “Palantir is one of the strongest companies in the AI space, especially when looking at directly selling AI to customers.” They put a spotlight on a $463 million contraction with the U.S. Special Forces for AI that was announced this week.
Looking at Q1 data, The Value Portfolio wrote, “The company signed 64 deals during the last quarter, and it's shown an increased ability to get large scale deals.” “The company has closed almost $400 million in new contracts, a 60% improvement YoY, foretelling strong potential revenue growth for the company versus prior growth rates,” they continued.
“Palantir's scale is also evident through deal sizes, with 22 deals at least $5 million and 8 at least $10 million,” The Value Portfolio said. And, they noted, that Palantir has a history of receiving larger and larger orders from legacy clients, resulting in “exciting” growth potential from its expanding client portfolio.
The Value Portfolio mentioned that at first glance, PLTR shares look expensive after their recent rally. Regarding PLTR’s valuation, they wrote, “the company has $750 million in annualized cash flow, which is a FCF yield of 2.5%. That's an atrocious long-term valuation and shows that the company has growth ahead to justify its current valuation.” But, due to Palatir’s rapid growth rate, The Value Portfolio believes that the company can grow into its present valuation - and more - concluding their report by saying:
“At a 2% FCF yield with a double-digit growth rate, Palantir Technologies Inc. has the ability to continue growing. It has no debt and a strong net cash position which means profits can be rapidly directed to shareholders. Putting all of this together, Palantir is a valuable long-term investment that can drive substantial returns.”
Bearish Nobias Credible Opinions:
Cavenagh Research, a Nobias 5-star rated author, who has been bullish on PLTR shares in the past, recently turned bearish, however. In an article published at Seeking Alpha on May 26, 2023, Cavenagh Research highlighted the reason for their sentiment shift.
“Overall,” they said, “I continue to like Palantir's value proposition in the fast-growing data analytics market. However, the risk/ reward for an investment is now considerably less attractive at about $13/ share than at $7/share, where the stock was trading only a few months ago.”
Cavenagh Research noted that PLTR beat Wall Street estimates on both the top and bottom lines during its Q1 report; however, they said, there were underlying concerns. Looking at PLTR’s Q1 top-line results, Cavenagh Research wrote, “During the period from January to end of March, the company generated group revenues of approximately $525.2 million, up about 18% YoY, and topping consensus estimate by approximately 4%, according to data collected by Refinitiv.”
Looking at profit-related metrics, they said, “GAAP operating income came in at $121.5 million, far exceeding even the upper end of optimistic estimates, and marking the second quarter in a row of GAAP profitability.” Despite these beats, Cavenagh Research laid out their bearish thesis on shares with 5 primary bullet points:
First, Palantir's dollar-based net retention rates fell about 400 basis points, to 111%, as compared to 115% one quarter prior.
Second, despite the revenue support brought about by SPACs related accounting, Palantir's commercial contribution margin declined 800 basis points.
Third, average revenue per employee fell $547 tsd of revenue per employee, down 9% YoY, as total headcount grew to 3,850, up 26% YoY.
Fourth, and expanding on employee-related metrics, I would like to point out that PLTR's share-based compensation expenses remain >20% of revenue!
Fifth, Palantir's growth appears to be slowing: Referencing, Palantir's 2Q revenue guidance of revenues in the range of $528-532M, I point out that QoQ growth slowed to 1%, while YoY growth slowed to 12% YoY, the lowest level since Palantir's IPO.
The author did note that Artificial Intelligence could be the growth catalyst that improves Palantir’s operations. “Recently, Palantir's management has emphasized the introduction of their Artificial Intelligence Platform (AIP), which enables customers to safely utilize large language models (LLMs),” they wrote.
“According to CEO [Alex] Karp,” Cavenagh Research said, “the demand for AIP has been unprecedented, as AI adoption captures the interest of a very wide range of customers, including the interest from over 100 Fortune 1000 companies.”
“Due to Palantir's significant experience in handling sensitive data and technology, the company is well-positioned to be a leading player in the emerging field of AI,” they added. However, the author concluded, “it is way too early to assign any 'equity value' to Palantir's AI capability and strategy, in my opinion.” And therefore, Cavenagh Research said, “Reflecting on rich valuation, paired with slowing growth in the core business, I downgrade Palantir to Underperform/ Sell.”
Michel Cohen, a Nobias 4-star rated author, recently highlighted another bearish report published by Edwin Dorsey, the author of The Bear Cave, which focused on PLTR’s recent rally and the future prospects of its shares.
Cohen wrote, “The Bear Cave views Palantir as an "AI imposter" and an "overhyped data consultant."’ Cohen said that Dorsey believes that Palantir “Management has fueled this enthusiasm, frequently mentioning "AI" during company calls. It was mentioned 68 times on their Q1 2023 conference call, up from 17 mentions in Q4 2022 and only six mentions in Q1 2022.”
Furthermore, Cohen wrote, “The Bear Cave alleges that Palantir inflates its financial metrics through certain practices, like investing in companies and then requiring those companies to buy Palantir products. It reportedly invested about $400 million across 20 SPAC mergers, with those companies then purchasing at least $700 million in Palantir software.” However, he states that Karp remains very bullish on his company’s prospects.
Cohen said, “Karp, meanwhile, spoke to Bloomberg on Thursday after hosting the company's AIPCon customer conference. His response to critics of the company and its software was "to ask the Russians."’
Sell-side Analysts Opinions
The most recent update provided on PLTR shares by Louie DiPalma, of William Blair & Company International, who is the only credible analyst that Nobias tracks who covers PLTR shares, was bearish as well.
According to the Fly on the Wall, “Last Tuesday, Space Systems Command, Los Angeles Air Force Base, announced that it awarded Palantir a three-month bridge extension, instead of a long-term renewal, on its Space Force data software services contract, which is Palantir's third-largest contract, William Blair analyst Louie DiPalma the analyst tells investors in a research note. And late Friday, Space Systems Command announced that it selected 17 other vendors along with Palantir for a five-year, $900M data analytics contract that builds upon the sole-sourced Palantir program, adds the analyst.
The firm says there is risk that Palantir's growth for the program will be limited as the Space Force "splits the pie among the numerous vendors." Over the long term, there is the potential for the same type of migration off of the Palantir platform that took place with the Raven program and is taking place for the FDA's CDER program, contends Blair. The firm sees risk that Palantir's "premium 8.5-times sales multiple will compress as competition pressures revenue growth and profitability." It keeps an Underperform rating on the shares and sees downside to $4 and $5 in a "bear case scenario."
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
This report was published in late March of 2023. Since then, PLTR shares have continued to rally.
Overall bias of Nobias Credible Analysts and Bloggers:
When looking at the reports by the credible authors and analysts that the Nobias algorithm tracks who cover PLTR shares, there is a major divergence in sentiment surrounding this stock. 57% of recent articles published by credible authors on PLTR stock have expressed a “Bullish” bias; however, the lone credible Wall Street analyst that Nobias tracks who has offered an opinion on PLTR shares believes that they’re likely to experience a significant sell-off.
On March 31st, 2023, PLTR was trading for $8.45/share. Today, shares are trading at $15.02/share. The price target being applied to PLTR by DiPalma is $7.00, which represents downside potential of approximately 53%.
Yet, as bulls have stated, Artificial Intelligence remains a long-term growth tailwind for Palantir, meaning that the bulls and the bears are likely to be grappling over this speculative growth stock for years to come.
Disclosure: Nicholas Ward is long PLTR. Nicholas Ward wrote this article for Nobias at their request with the intention of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
Additional disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.
Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.