When looking over the past several months, shares of Palantir Technologies (PLTR) have not participated in the AI trade as the company’s investors hoped it would. In fact, Palantir stock has grossly underperformed the market, falling some 20% over the past six months, including a 4.85% decline year to date, trailing the S&P 500 index in both spans.
There’s an argument to be made that the stock is undervalued, especially when looking at the company’s growth prospect in the realm of AI. The analytics platform specialist is set to report fourth quarter fiscal 2023 earnings results after the closing bell Monday. Although the company is broadly known for its work with the U.S. government’s defense and intelligence agencies, Palantir’s data analytics capabilities now includes a number of AI-powered services for organizations across public and private sectors.
However, analyst Brent Thill at Jefferies isn’t impressed. The investment firm recently downgraded the stock, calling the company’s artificial intelligence story as “overhyped.” Thill lowered his rating on Palantir to Underperform from Hold with a $13 price target on the stock. From current levels, that translates to a potential decline of 20%. “We are still fundamental fans and believe that the company has potential to gain share in an under-penetrated and large [total addressable market] but think concern over top-line growth will be the primary driver of stock performance over the next 12 months.”
Thill’s somewhat bearishness is counter to the enthusiasm Palantir CEO Alex Karp has displayed in previous quarters. In referring to Palantir’s new artificial intelligence platform, Karp has cited demand for the platform is “without precedent.” Nevertheless, for the stock to reverse course, investors will be watching for metrics such as customer additions, billings value as well as segment financials to assess whether Palantir’s near-term stock value.
In the three months that ended December, the Denver, CO-based company is expected to earn 8 cents per share on revenue of $602.79 million. This compares to the year-ago quarter when earnings came to 4 cents per share on revenue of $508.62 million. For the full year, earnings are expected to be 25 cents per share, up from earnings of 6 cents per share a year ago, while full-year revenue of the $2.22 billion would rise 16.5% year over year.
Despite the projected year-over-year improvements, the analyst community remains broadly cautious on what the company will release in terms of revenue and profits. Although revenue is expected to grow, the rate of growth has slowed due to, among other things, rising competition and macroeconomic headwinds. It’s for this reason, among others, that the stock is currently trading above its 12-months price target of $15.36, suggesting 8% decline from current levels.
However, Palantir’s fundamental are showing improvements, reporting a 17% year-over-year revenue growth in Q3, reaching $558 million, which beat Street estimates and its own guidance of $535 million. Of that total, Government revenue rose 12% year-over-year to $308 million, while Commercial revenue, specifically enterprise customers, rose 23% year-over-year to $251 million, including $116 million in U.S. commercial revenue.
Meanwhile, the company displayed a strong margin profile with Q3 gross margin coming in at 81%. Adjusted free cash flow of $141 million was also strong, marking a 25% margin, while cash from operations of $133 million represented a 24% margin. This suggests not only does Palantir have a strong competitive advantage, the company is now capitalizing on the expansion of new use cases.
Assuming continued growth within the AI landscape, Palantir’s revenue growth rate is poised to accelerate, especially as macroeconomic conditions get better, making Palantir one of the better stocks to own in the next 12 to 18 months.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
