Steven Puetzer/The Image Bank via Getty Images
In November 2023, we previously discussed Palantir Technologies Inc. (PLTR) and its management’s exceptional marketing approach for AIP, likely to accelerate its top-line and customer base expansions.
Since the nascent generative AI SaaS market still offers considerable room for growth, we upheld our Buy rating post a moderate pullback.
Here, we will evaluate the reasons for downgrading the PLTR stock to a Hold, given the significant premium in its stock valuations and limited upside potential in the stock prices.
Despite our confidence in its long-term prospects, it might be wise to await a moderate pullback to its previous resistance level of $17s for dollar-cost averaging.
The Generative AI Investment Thesis Has Gone Overboard with PLTR
Presently, PLTR reported a top-line beat in its FQ4’23 earnings call, with revenues of $608.35M (+8.9% QoQ/ +19.6% YoY) and adj EPS of $0.08 (+14.2% QoQ/ +100% YoY).
Its robust commercial revenues of $284M (+13.3% QoQ/ +31.8% YoY) primarily drove the top-line growth, fueled by the increasing demand for its commercial offerings, notably the AIP.
While PLTR’s government revenues exhibited signs of slowing growth at $324M (+5.3% QoQ/ +10.5% YoY) in the latest quarter, the upturn in commercial spending appears adequate to offset the headwinds.
This trend is evident in the growing total Remaining Performance Obligations [RPO] of $1.24B (+25.8% QoQ/ +27.7% YoY) – primarily in the long-term RPO of $600M (+40.1% QoQ/ +31.5% YoY), expanding adj gross margins of 84% (+2 QoQ/ +2 YoY), and Net Retention Dollar of 108% (+1 QoQ/ -7 YoY).
These factors, coupled with the accelerating overall customer count to 497 (+44 QoQ/ +130 YoY), undeniably reflect robust demand for its SaaS offerings, marking the resurgence of its high growth trajectory as more companies invest in their generative AI capabilities amid a seeming global soft landing.
PLTR’s bottom line tailwinds can also be attributed to the deceleration observed in its operating expenses growth to $433.92M (+5.7% QoQ/ +2.7% YoY) in FQ4’23.
This is partly aided by the utilization of its balance sheet during elevated interest rates, yielding $44.41M in net interest income (+22.9% QoQ/ +302.2% YoY) and a slowdown in share count growth to 2.35B (+1.2% QoQ/ +6.8% YoY) in the latest quarter.
It seems that the PLTR management has successfully managed the previously lavish stock-based compensation, significantly supported by the yet-to-be-utilized $1B share repurchase program.
With a burgeoning $3.67B net cash in the balance sheet (+11.8% QoQ/ +39.5% YoY) and virtually no debt, it is understandable why the market has shown enthusiasm, further fueled by the buzz surrounding generative AI.
PLTR Valuations
Despite being PLTR’s shareholders ourselves, it is evident that at FWD P/E valuations of 67.70x and FWD Price/ Cash Flow of 64.92x, the stock has been excessively inflated. This is in comparison to its 1Y mean of 57.53x/ 68.97x and sector median of 24.72x/ 22.58x, respectively.
Even when comparing its valuations to other generative AI plays, such as Microsoft (MSFT) at 34.70x/ 27.42x, Nvidia (NVDA) at 56.38x/ 90.94x, and CrowdStrike (CRWD) at 102.28x/ 42.18x, it is apparent that the hype around generative AI SaaS may have gone too far at this juncture.
With the hype reaching an extreme, it is reminiscent of the similar trend observed during the peak of hyper-pandemic euphoria in November 2021, with the subsequent correction proving to be exceedingly painful.
The Consensus Forward Estimates
Tikr Terminal
The consensus forward projections for PLTR have consistently been revised downward to a top/ bottom line Compound Annual Growth Rate (CAGR) of +20.3%/ +23.2% up to FY2026.
These figures are noticeable in their moderation compared to the previous projections of +26.4%/ +28.4% and the historical top-line growth of +30.1% between FY2018 and FY2023 respectively.
Although the management’s estimated revenue for FY2024 stands at $2.656B (+19.3% Year-over-Year [YoY]), showing acceleration from the $2.22B recorded in FY2023 (+16.7% YoY), these numbers still pale in comparison to the +47.2% YoY growth observed in FY2020.
As a result of the excessively inflated valuations and the trend of decelerating growth, it seems that investors must contain their enthusiasm, given that the market has already factored in much of PLTR’s potential upside.
Based on the consensus adjusted EPS estimates for FY2026 of $0.47 and its 1-year Price/Earnings (P/E) ratio mean of 57.42x, there seems to be limited potential for upside of +13.9% to our long-term price target of $26.90 as well.
Therefore, is PLTR Stock Worth Considering, Selling, or Holding?
PLTR 3-Year Stock Price
Trading View
On one hand, PLTR has recently peaked, seemingly breaking through its 50/100/200-day moving averages, while testing its previous resistance level in the $20s range.
Despite the observed pattern of rises and falls following its last three earnings calls, it’s evident that the stock has maintained its upward momentum since May 2023, setting new highs/new lows and with the $17/$18 range likely to become its next support level.
On the other hand, the combination of improving market sentiment, declining inflation, the possibility of the Federal Reserve’s pivot by H1’24, and the increasingly insatiable stock market index present significant uncertainties regarding the sustainability of PLTR’s excessively premium valuations and upward trajectory in the near term.
This situation is where the quote, “the trend is your friend until the end when it bends”, seems highly applicable. With the uptrend apparently gaining strength, we may witness further increases in the stock’s value for a little while longer, potentially triggering short-term trading gains.
Nevertheless, we anticipate potential volatility in the near term, with the stock market likely to retract after the initial hype of the earnings season has waned.
Due to the possible volatility, we recommend prudently considering the stock as a Hold at this point, with interested investors advised to monitor for lower entry points in line with their dollar-cost averaging strategy and risk tolerance.
It is cautioned not to pursue this rally at this point.