Palantir Technologies shares moved lower in early Monday trading after a top Wall Street analyst assumed coverage of the stock with a cautious outlook heading into the year.
Palantir (PLTR) shares added around $150 billion in market value last year, a standout performer in the data-analytics and AI-tech space as investors bet on the profit potential of its government contracts and its addition to the S&P 500 in late September.
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The group justified some of that investor sentiment in the fall when it boosted its full-year revenue forecast for the third time during the year, thanks in part to outsized gains from its nonmilitary business.
Palantir's U.S. business saw revenue rise 44% over the three months ending in October to $499 million, the bulk of it coming from its government-focused business.
Commercial revenue, which includes testing and reworking artificial-intelligence systems through its AIP Logic platform, and so-called boot camps for companies that are scaling the new technology across their business processes, grew at a faster rate, to $179 million.
"To put it bluntly, if executive management teams and decision makers want to get their AI initiative into live production environment rapidly, Palantir has emerged as one the select few partners to call," said Morgan Stanley analyst Sanjit Singh.
Concern about Palantir valuation
Singh argues, however, that while the investment bank's "positively revised assessment of Palantir's positioning in the generative AI cycle is well reflected in [the] shares," he remains cautious about its near-term outlook.
"While we acknowledge this positive inflection and are looking for ways to become more constructive on [the] shares, the lack of visibility on material estimate revisions leaves Palantir trading too far ahead of the company’s intrinsic value to justify a rating upgrade," Singh and his team wrote in a note published Monday.
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Singh, who assumed coverage of the stock this year after it was dropped by the bank in November, pegged his price target at $60 a share and assigned an 'underweight' rating to the Denver-based group.
Singh argues that Palantir's 340% gain last year was "driven almost entirely by multiple expansion," particularly with respect to the value investors assigned to the stock compared with the sales forecasts for the next 12 months.
Palantir sees 2024 revenue in the region of $2.805 billion to $2.809 billion, an 8% improvement from its prior forecast, with operating profit of around $1.055 billion.
Palantir revenue growth lags cash flow
Singh notes that Palantir's free-cash flow growth rate for this year is pegged at around 41%, "largely due to expense discipline rather than revenue upside, as [calendar year 2025] revenue estimates are only +10% higher compared to the start of the [year. And] with management signaling an investment cycle ahead, further expansion looks muted."
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He also notes that Palantir's fast-growing commercial business, "where most of the AI narrative is expected to play out," is likely to contribute less to its 2025 sales outlook than its legacy government business.
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"Business momentum now appears to be stabilizing versus inflecting higher, with 13 of 23 [key performance indicators] downticking quarter-over-quarter in Q3, after showing the best rate-of-change improvements in the prior quarter," Singh and his team wrote.
Palantir shares were marked 2.5% lower in early Monday trading to change hands at $77.90 each.
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