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After soaring 35% in November, shares of Palantir Technologies (PLTR) fell over 9% yesterday, valuing the tech stock at $40 billion by market cap. Along with broad-based selling to start the week, PLTR in particular was hit by a bearish analyst note focused on a key Army contract.
Specifically, William Blair analyst Louie DiPalma noted that Palantir’s four-year contract with the U.S. Army, worth $458 million, is up for renewal this month - and due to friction over data ownership issues, the value of a renewal contract could be “significantly less,” as the Army looks to diversify across multiple vendors.
Notably, government contracts accounted for 55% of the company's total sales in Q3, and this number might move lower if other military and federal agencies look to reduce their dependence on Palantir as a vendor going forward.
DiPalma reiterated his “underperform” rating on PLTR, noting that shares trade at 125x future cash flows. The analyst stated, “Over the next 12 months, we expect Palantir’s multiple to compress as a result of competitive pressures for new defense contracts.”
That said, Palantir stock is no stranger to bearish analyst notes. In fact, the Street-low price target - which, for the record, does not belong to DiPalma - implies expected downside of nearly 73% from current levels.
Is Palantir Stock a Good Buy Right Now?
Thanks in large part to its foothold in the field of artificial intelligence (AI)-driven enterprise software, Palantir stock has outpaced the broader markets by a wide margin in 2023. PLTR is up 185% year-to-date, bolstered by impressive top-line growth and expanding profit margins.
The company increased sales by 17% year over year to $558 million in Q3, and generated net income of $72 million. In the last 12 months, its net income has totaled $147 million, and the stock has become eligible for inclusion in the benchmark S&P 500 Index ($SPX).
Palantir emphasized revenue growth was driven by commercial contracts in the U.S., which grew 33% to $116 million. The reacceleration in the growth of this business was attributed to the growing demand experienced for its artificial intelligence platform (AIP), released in early 2023. Palantir claimed companies across industries in the U.S. are deploying its AI-powered software platform, and aim to leverage the power of the latest large language models.
Moreover, the revenue generated per employee by Palantir has almost doubled in the last few years. The company ended Q3 of 2019 with 2,358 employees and $795 million in trailing 12-month sales, indicating the average employee earned $299,000. This number has grown to $558,000 per employee in Q3 of 2023.
What Is the Target Price for Palantir Stock?
Despite its market-thumping gains in 2023, Palantir stock still trades 145% below its all-time highs. It is forecast to grow adjusted earnings to $0.29 per share in 2024, suggesting the tech stock trades at 63.5 times forward earnings - which is very steep, especially if the value of government contracts moves lower in the next 12 months.
Out of the 14 analysts tracking PLTR, only two recommend “strong buy,” one recommends “moderate buy,” five recommend “hold,” one recommends “moderate sell,” and five recommend “strong sell.”
The average target price for Palantir stock is $14.65, which is 20% below current prices. RBC Capital has the Street-low price target of $5.00, which is nearly 73% below current levels. Notably, the RBC analyst described a recent NHS contract win for PLTR as “underwhelming" due to its smaller-than-expected size, as well as the fact that the award was split among multiple vendors.
