Is the recent decline in Palantir's stock price a potential buying opportunity?
5min read Palantir Technologies $PLTR(PLTR) is a standout name in the artificial intelligence sector that has captured significant market attention. Despite posting a solid earnings beat and raising future expectations, Palantir's stock experienced a downturn, highlighting the complexities of its high valuation and the heightened expectations that accompany it. We will explore the nuances of Palantir"s business model, examine the details of its first-quarter results, and highlight its performance in the commercial sector. Additionally, we'll assess the guidance provided for upcoming quarters and discuss the implications of the company"s valuation on its stock performance. This comprehensive review aims to unpack the factors driving investor sentiment and the potential trajectory of Palantir in the competitive AI landscape. The Business Model Palantir has adopted a unique approach to marketing and selling its software solutions, focusing less on traditional sales tactics and more on allowing potential partners to directly experience their software. This hands-on strategy lets users determine the effectiveness and suitability of the software for their specific needs without the usual marketing frills. Unlike many competitors who prioritize marketing efforts, Palantir invests heavily in developing software platforms that deliver measurable and transformative results, providing the essential infrastructure needed to integrate advanced functionalities such as write-back capabilities, data lineage tracking, and seamless interactions between human and algorithmic agents. The company aims to establish its Artificial Intelligence Platform (AIP) as the leading infrastructure in the industry, enhancing the deployment of artificial intelligence and large language models across a variety of institutions. Palantir is expanding the accessibility of AIP to a diverse range of entities, from private sector businesses both domestically and internationally, to state and local governments, as well as the academic and scientific communities. CEO Alex Karp emphasizes the unique position of the United States in adopting AI technologies, and positions Palantir as a pivotal provider of the necessary infrastructure to harness the true potential of large language models, underlining a new company direction with the motto beyond chat. This strategy reflects Palantir"s commitment to driving forward the practical and widespread application of AI technologies. First Quarter Earnings Palantir Technologies reported strong first-quarter earnings in 2024, surpassing expectations as revenue increased 21% year-over-year, reaching $634 million. This growth was largely driven by the successful adoption of their artificial intelligence tools, especially among U.S. commercial customers. Palantir's recent profitability marks a significant milestone, with the company announcing a $106 million profit for the quarter, the largest in its twenty-year history. This achievement is particularly notable considering the skepticism around the company's profitability potential. The profit generated in this single quarter now surpasses the total annual revenue Palantir reported just over a decade ago. This growth underscores the company's evolving business model and the increasing effectiveness of its software solutions in leveraging large-scale data analytics and artificial intelligence. The company reported earnings that surpassed revenue expectations, attributed to demand for its Artificial Intelligence Platform (AIP), strong performance in the U.S. commercial sector, and a notable uptick in government sales. These positive developments led Raymond James to reiterate an Outperform rating with a $25 target, citing strong profits, free cash flow, and sustained momentum in AIP. However, concerns were raised about the sustainability of this revenue, particularly as some of it was attributed to SPAC-related adjustments, which could distort the true organic growth rate. Corporate Growth Palantir Technologies is increasingly solidifying its position within the U.S. commercial sector, driven by the rising awareness and demand for advanced enterprise software solutions, particularly artificial intelligence and large language models. The company reported revenue growth in this segment, with a 40% increase year-over-year, totaling $150 million for the quarter ending March 31, 2024. This surge underscores the growing significance of AI and LLM technologies in transforming various industries. Palantir anticipates this momentum to continue, projecting over 45% growth in U.S. commercial business revenue for 2024 compared to the previous year, indicating a strong upward trajectory in this market. However, while the U.S. commercial segment is experiencing substantial growth, there was a noted deceleration in its growth rate from a previous 70% in the December quarter to 40% more recently, which has sparked some concerns among analysts despite the overall positive trend. Despite this slowdown, the commercial business segment as a whole performed well, generating $299 million in revenue exceeding the consensus of $292 million. Furthermore, Palantir reported a significant increase in remaining deal value for U.S. commercial customers, up 74% from the previous year, and a 52% increase in the total number of signed deals, including a remarkable 94% increase in U.S. commercial deals specifically. Adding to Palantir"s optimistic performance metrics, the government business segment also delivered strong results, outperforming expectations with $335 million in revenue, surpassing the consensus estimate of $322 million. This represents a 16% increase year-over-year and marks an acceleration from the 11% growth observed in the December quarter. This unexpected uplift in the government sector complements the solid gains seen in the commercial division, cementing Palantir"s overall growth trajectory. The company's ability to drive substantial growth across both commercial and government sectors underscores its strategic success and positions it as a critical player in the expanding market for AI-driven enterprise solutions. Palantir"s Outlook Palantir Technologies has issued strong financial guidance for the upcoming periods, reflecting optimism in its operational and financial trajectory. For the June quarter, the company anticipates revenues to be between $649 million and $653 million, which surpasses the consensus estimate of $643 million. Additionally, adjusted operating income for the same period is expected to range from $209 million to $213 million, also exceeding Wall Street"s expectations of $201 million. Looking ahead to the full year, Palantir has revised its revenue forecasts upward to between $2.677 billion and $2.689 billion, an increase from the previous projection of $2.652 billion to $2.668 billion. This update comes with an optimistic outlook for its U.S. commercial business, now expected to grow at least 45% to exceed $661 million, up from the earlier estimate of 40% growth. Furthermore, the company has raised its expectations for adjusted operating income to fall between $868 million and $880 million, up from the previously forecasted range of $834 million to $850 million. Palantir reaffirmed its adjusted free cash flow forecast for the year, which remains set at $800 million to $1 billion and continues to project profitability on a GAAP operating income and net income basis for each quarter of the year. These guidance updates signal strong confidence in the company"s financial health and growth prospects. Despite the financial successes and operational milestones, Palantir's shares experienced a 15% drop early on a Tuesday, influenced by weaker-than-expected full-year revenue guidance. This downturn occurred even as quarterly revenue growth accelerated and the customer count increased, supported by innovative strategies like offering boot camps to potential customers to trial their platforms. In addition, billings and free cash flow fell short of Wall Street expectations, alongside worries over decelerating commercial revenue growth. While the next quarter's revenue guidance was above estimates, signaling potential recovery, the mixed financial results led to varied analyst perspectives on the company"s valuation and future performance. Analyst Comments Contrary to the negative stock reaction, several Wall Street analysts adjusted their price targets upwards, reflecting a belief in the company's continued growth potential and strength in artificial intelligence capabilities. This mixed financial landscape highlights the complex interplay between company performance, market expectations, and investor sentiment in the dynamic tech sector. On the valuation front, analysts expressed concerns despite the company's strong recent performance. For instance, Mizuho"s Gregg Moskowitz pointed out the high trading multiple against estimated sales, suggesting that Palantir needs to demonstrate more consistent execution and growth to justify such a valuation. Similarly, William Blair"s Louie DiPalma was skeptical about the sustainability of U.S. commercial momentum, highlighting that Palantir"s revenue guidance remains below previous consensus expectations. On a more optimistic note, Wedbush analyst Dan Ives viewed any stock sell-off as a buying opportunity, emphasizing the strength of Palantir"s reported numbers and maintaining an Outperform rating with a higher $35 target price. Conclusion Palantir Technologies (PLTR) trades at $21.66 per share, 18.2% below its 52-week high. Despite a year-to-date rise of 26% and an impressive 191% surge over the past year, the stock's current valuation remains a concern. Trading at 54 times forward earnings and 21.6 times price-to-sales, the valuation appears stretched, especially in a changing economic environment where interest rates are no longer at historic lows. Given the current market dynamics and Palantir's pivotal role in the AI sector—where data continues to drive advancements in large language models—the company is positioned in a compelling segment of the tech industry. However, the recent price action reflects the market's reaction to earnings that, although strong, did not meet the high expectations set by such a lofty valuation. This has resulted in the stock slipping below the 20-day moving average, suggesting some hesitation among investors. Despite these challenges, the broader market sentiment and the undiminished potential of the AI industry provide a favorable backdrop. Therefore, we advise investors to consider initiating a position at the current levels and be prepared to average down if necessary. This strategy could capitalize on any further weaknesses as an opportunity, especially if the Fear of Missing Out (FOMO) trade intensifies, prompting investors to view any pullbacks as buying opportunities. In essence, entering early and adjusting holdings based on market movements could position investors well in a stock that is likely to remain a focal point in the tech sector.
