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Palantir Technologies (PLTR) is a software company that caters to the data-analyzing needs of private organizations and governments. It creates platforms for data integration, management, and analysis. This year, Palantir has been at the forefront of the artificial intelligence (AI) revolution, captivating investors with its potential for growth in the data analytics and AI domain.
PLTR shares have risen 155% year to date, outperforming the S&P 500 Index ($SPX) by a wide margin. Nonetheless, the stock is down 18.8% from its 52-week high, and many Wall Street analysts have expressed a bearish outlook for PLTR over the next 12 months.
However, some analysts believe the stock's AI capabilities are being underestimated, which could be a significant factor in its long-term upside potential.
Palantir’s Focus on AI Could Drive Long-Term Growth
Palantir's strategic investments are improving its financials, as evidenced by its second-quarter earnings. In its Q2 earnings call, Palantir’s CEO, Alex Karp, stated that the company's newly launched AIP, or Artificial Intelligence Platform, is receiving "unprecedented inbound interest." The technology employs large language models to improve data analysis and decision-making.
Furthermore, Palantir has forged a 5-year partnership with CAZ Investments to "provide AI-powered solutions to accelerate partner onboarding and augment investment managers’ work with generative AI.” Recently, Palantir bagged a $250 million contract with the U.S. Army until 2026 to scale AI and machine learning capabilities.
Palantir and PwC have also collaborated for enhanced data analytics and AI-enabled operations. In Q2, the company also secured some new contracts with government agencies. These strategic deals have the potential to boost the company's revenue in the coming years.
In Q2, Palantir generated 57% of its total revenue from government customers, with the remainder coming from commercial customers. A perk of the government sector contributing to a chunk of revenue is that it should safeguard Palantir during times of economic uncertainty.
In the quarter, total revenue grew 13% year-over-year to $533 million, marking its third consecutive quarter of GAAP profits.
Looking forward to Q3, management forecasts a profitable quarter, with revenue ranging between $553 million and $557 million. For the full year, management raised its guidance to revenue of $2.21 billion and GAAP net income in every quarter this year.
In addition, the company ended the quarter with a massive cash balance of $3.1 billion and an adjusted free cash flow of $96 million. Palantir can fund future AI projects and strategic collaborations, thanks to its debt-free balance sheet.
Wall Street’s Opinion About Palantir Is a Mixed Bag
Wall Street is split when it comes to Palantir’s short-term outlook. William Blair analyst Louie DiPalma believes Palantir’s “2024 revenue estimate of $2.6 billion already factors in a complete contribution from the expected £480 million, 7-year U.K. NHS Federated Data Platform (FDP) contract.” The analyst sees more downside to the stock amid rising competition from top AI tech players like Microsoft (MSFT), Amazon (AMZN), Databricks, and more. The analyst has a “sell” rating on the stock, with no target price.
Meanwhile, Wedbush analyst Daniel Ives has a very optimistic outlook for Palantir after the AIP conference last month. The analyst said Palantir customers vary across a “myriad of industries (financial services, oil & gas, transportation, manufacturing, healthcare, software, services, etc.)” and believes “Foundry and AIP are leading the commercial front with a loyal consumer base paving the way for future success stories."
Ives strongly believes Palantir is a “pure play AI name” and will be a significant AI stock in the coming years. He has a “buy” rating and the highest target price of $25 for PLTR, indicating expected 51% upside potential.
Raymond James analyst Brian Gesuale is also bullish on PLTR, based on its strong Q2 results and guidance for profitable quarters in 2023. The analyst also said, “More importantly, the company is building AIP (Artificial Intelligence Platform) customer momentum faster than our 2025 high-on-the Street model contemplated,” with AIP users “spanning 100 organizations and another 300 organizations in active discussions.” The analyst has a “buy” rating on the stock, with a newly increased target price of $22 (from $18).
What's the Consensus on PLTR?
For the third quarter, analysts expect revenue to come in around $556.4 million, a 16.4% year-over-year increase, with earnings per share (EPS) pegged at $0.02. Q3 results are expected on Nov. 3.
Furthermore, analysts expect Palantir’s top line to increase from $1.9 billion in fiscal 2022 to $2.21 billion in fiscal 2023, in line with management’s forecasts. That represents a year-over-year growth of 16.2%. Revenue could further increase by 19.0% to $2.64 billion in fiscal 2024.
In addition, analysts expect EPS to jump an astounding 135% to $0.07 in fiscal 2023, with further growth to $0.11 projected for fiscal 2024.
Overall, Wall Street rates the stock a “hold.” Out of the 14 analysts covering Palantir stock, 2 have a “strong buy” recommendation, 1 suggests a “moderate buy,” and five call it a “hold.” The stock also has 1 “moderate sell” and 5 “strong sell” recommendations.
Based on analysts' average price target of $13.81, Wall Street sees a potential downside of about 16% over the next 12 months. The stock trades at 18 times forward sales and 60 times forward earnings, based on 2024 growth estimates - which seems quite steep at the moment.
If Palantir can justify its lofty price-to-sales valuation and the market's perception shifts, it may be able to reach its high price target of $25 in the next 12 months.
The Key Takeaway
AI is a rapidly evolving field that holds enormous potential, and Palantir is at the center of the data analytics and AI revolution. As the company expands its customer base, forms strategic partnerships, and innovates in the AI space, Palantir has good long-term growth potential.
That said, emerging tech companies like Palantir carry risk, so investors should be cautious before making any investment decisions.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
