Going Into Earnings, Is Palantir Stock a Buy, a Sell, or Fairly Valued After Its Huge Rally?

Palantir Technologies PLTR is set to release its second-quarter earnings report on Monday, Aug. 7, after the close of trading. The stock has surged this year, more than tripling in price as of the end of July. Here’s Morningstar’s take on what to look for in Palantir’s earnings and stock.

Key Morningstar Metrics for Palantir Technologies

• Fair Value Estimate: $9.00
• Morningstar Rating: 1 star
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High

What to Watch for in Palantir’s Q2 Earnings

• Billings: Is there strong billings acceleration associated with artificial intelligence-generated tailwinds? We’d expect strong growth in billings as customers flock to the AI platform AIP.
• Customer additions (particularly in commercial): Similarly, we’d expect an uptick in the number of customers, as companies onboard Palantir due to their desire to leverage AI. We’ll be looking at commercial clients in particular, as they would be the perfect target audience for AIP.
• Net retention expansion: Recently, Palantir’s net revenue retention has fallen. This is a consequence of customers not expanding usage with the firm during a tough macro environment. However, if AIP’s performance matches its promise, we’d see an uptick in net retention and existing customers expanding their usage of Palantir’s solutions.

Fair Value Estimate for Palantir Stock

With its 1-star rating, we believe Palantir’s stock is significantly overvalued compared with our fair value estimate.

We forecast Palantir’s revenue growing at a 22.5% compound annual growth rate over the next five years as the firm expands both governmental and commercial operations. We expect the majority of this top-line growth to be driven by commercial clients as the firm seeks to broaden that base. While government clients can be sticky, large governmental contracts create lumpiness in revenue. As a result, Palantir’s shift to more commercial clients will enable the firm to create a more ratable revenue mix.

We also expect the firm to continue expanding sales within its existing client base. We view Palantir’s strong net retention rate as an indicator of this.

Read more about the fair value estimate for Palantir stock.

Economic Moat Rating

We assign Palantir a narrow economic moat, owing primarily to strong switching costs associated with its platforms, as well as intangible assets in the form of strong customer relationships the firm has built over the years. We think Palantir’s two main platforms, Gotham and Foundry, benefit from high customer switching costs, as evidenced by the firm’s strong gross and net retention metrics. Palantir has exhibited strong customer growth while diversifying its business away from lumpy governmental contracts toward commercial clients. As a result, although we forecast a couple more years of hefty operating losses, we ultimately expect the firm to generate excess returns over invested capital on the whole over the next decade.

The primary use case for Palantir, across its governmental and commercial clients, is the ability to leverage data to develop insights and create efficiencies in an organization’s operations. Palantir’s two key platforms, Gotham and Foundry, serve the governmental and commercial end markets, respectively. More recently the firm has launched a third platform, Apollo, which ensures Palantir’s clients have continuous delivery of Gotham and Foundry, irrespective of whether they have deployed these platforms on the cloud or on-premise.

Overall, we think that Palantir is still in the early innings in terms of customer penetration and platform adoption. As increased digitization of large organizations continues to drive clients toward AI/ML platforms, we believe Palantir has a long runway for growth. We view major opportunities for the firm in both commercial and governmental end markets as organizations shift away from in-house solutions that are expensive and unscalable over the long run.

Read more about Palantir’s moat rating.

Risk and Uncertainty

We assign Palantir a Very High Uncertainty Rating due to some key risks we view as potentially impeding the firm’s growth trajectory.

While Palantir has landed high-value commercial and government clients over the years, we have found the executive team’s execution to be questionable at best. The firm’s sales strategy has led to relatively poor customer acquisition; despite being in the commercial space for many years, Palantir’s commercial customer count is only slightly more than 200. While the firm has pivoted to a module-based sales model that should bolster commercial customer additions, execution against this strategy remains to be seen.

Our lack of confidence in the executive team is highlighted by the firm’s SPAC investment program, which led to more than $300 million of losses for the firm as investments in early-stage companies went south as markets recalibrated in 2022. These investments, based on a quid pro quo of the investees becoming Palantir customers, were a bit reckless, in our view.

Read more about Palantir’s risk and uncertainty.

PLTR Bulls Say

• Palantir has strong secular tailwinds, as the AI/ML market is expected to grow rapidly due to the exponential increase in data harvested by organizations.
• With products targeting both commercial and governmental clients, Palantir has a distributed top line that’s insulated by noncyclical governmental revenue during lean times.
• Palantir’s focus on modular sales could potentially lead to substantially more commercial clients, which the firm could subsequently upsell.

PLTR Bears Say

• By not selling to countries/companies that are antithetical to Palantir’s mission and cultural values, the firm has self-restricted its growth opportunities.
• It will likely be several years before Palantir will achieve generally accepted accounting principle profitability.
• Palantir’s executive team has made questionable strategic decisions in the past. While past performance isn’t necessarily indicative of future results, we highlight some missteps as a cautionary tale for potential investors.

This article was compiled by Tom Lauricella.