Palantir results provide litmus test for a 140% AI-powered rally

(Bloomberg) — Palantir Technologies Inc.'s premium valuation will be put to the test when the data analytics and software company reports results after the market close on Monday.

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The bar is set high after a rapid artificial intelligence-driven rally of more than 140% this year. Wall Street has become increasingly cautious on Palantir, with its average target implying a decline of more than 30% over the next 12 months. At the same time, investors are still wary of AI-related names and want to see more tangible results from the emerging technology. The results from Amazon.com Inc., Microsoft Corp., Meta Platforms Inc. and Apple Inc. drew mixed reactions.

“We cannot explain 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 future earnings, while Oracle Corp. and Microsoft both trade at less than 30x. Palantir shares were trading about 0.6% lower in afternoon trading in New York.

“Without a substantial beat-and-raise quarter that lifts the near-term growth trajectory, valuation appears unsustainable,” Jaluria said. RBC has an Underperform rating and a $9 price target on Palantir – about 80% lower than the current price.

Optimistic investors see it differently and helped push the stock to a record high last month. The company, which generates just over half of its revenue from government contracts, was buoyed by its recent inclusion in the S&P 500 and is now the third-best performer on that benchmark in 2024, behind only Vistra Corp. and Nvidia Corp.

Palantir is “one of the few companies supporting Gen AI that is actually seeing upside in both the enterprise and government sectors,” said Ted Mortonson, managing director at Robert W. Baird & Co. “The road is just missing, quite frankly, how powerful is their AI-based core platform.”

Palantir is expected to report adjusted earnings per share of 9 cents in the third quarter, up 29% from a year earlier, but at 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 pay particular attention to acquiring new customers and selling AI tools to corporate customers. Wall Street estimates government revenue will rise 23% to nearly $379 million, while commercial revenue is expected to rise about 32% to $330 million. Palantir has added several new corporate customers this year, including CBS Broadcasting, General Mills Inc. and Aramark Services Inc.

“We need to continue to see this dynamic” in trade deals, Mortonson said.

Joe Tigay, portfolio manager at Equity Armor Investments LLC, also focuses on this metric. “They've got really big contracts, but they're really just scratching the surface in terms of the type of customers they can reach,” he said.

RBC's Jaluria, however, is skeptical that Palantir can keep up with the pace of success in the commercial sector, given the strong competition and suitability of Palantir's products outside of large, non-technical companies.

RBC analysts also note that Palantir's rally has been helped by a high proportion of retail investors – a group that could quickly upset the stock, especially if the company doesn't start returning significant capital to investors. Palantir does not offer a dividend and had $973.3 million of a total authorized share repurchase program of $1 billion as of June 30.

“Given Palantir's cash balance of $4 billion, we expect retail investors may be (rightfully) frustrated by the company's unwillingness to return capital to shareholders given no apparent interest in pursuing M&A opportunities exist,” Jaluria wrote.

Tech chart of the day

Nvidia Corp. is threatening to reclaim the title of world's most valuable company from iPhone maker Apple Inc. Shares of the chipmaker are rising on Monday after the S&P Dow Jones Indices said on Friday that Nvidia will buy rival Intel Corp. in the Dow Jones Industrial will replace average. Meanwhile, Apple shares are in the red after Warren Buffett's Berkshire Hathaway continued to sell shares of the company in the third quarter. The spread between the two tech giants was about $50 billion as of Friday's close.

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