Palantir’s [PLTR] share price has had a shocker following third quarter earnings posted in November. Since 8 November, the data analytic firm’s stock has fallen over 30% with the results showing a slowdown in growth leading to analyst chatter that the stock is overvalued.
Up until the results Palantir’s share price had been performing well since joining the S&P 500 just over a year ago. And since the start of the year up until 8 November, the stock had delivered a solid 13.59% gain.
There’s plenty of reason to be optimistic about the company. Palantir’s tech has been used to help locate Osama bin Laden, and it could take advantage of a burgeoning crypto market. Earnings have also seen a double digit growth rate, even if that is slowing.
Considering the dip over the past two months, there’s the possibility that the stock is now trading at a more reasonable level for a longer-term investment.
Palantir’s share price drops after third quarter earnings
On first glance, Palantir’s share price tanking comes as a surprise considering third quarter earnings were solid. In the results, revenue topped Wall Street expectations ($392m versus an expected $385m), and earnings met a forecasted $0.04 a share. The data analytics company guided for fourth quarter revenue of $418m, again topping expectations, and for the full year expects $1.53bn in sales, up 40% year-on-year.
Palantir's expectations for Q4 sales is up 40% year-on-year
So why’s Palantir’s share price falling? The big reason is that while third quarter revenues were up 36% year-on-year, the previous two quarters had seen 49% year-on-year growth. And as Palantir trades at a forward price to earnings ratio of 92.59, according to data from Yahoo Finance, any drop in growth brings the stock’s toppy valuation into question.
The slowing growth dominated analyst notes following the earnings. William Blair analyst Kamil Mielczarek said that growth in the second half of 2021 had come from strategic investments and the analyst was concerned that the company would struggle to maintain 30% organic growth.
Over at RBC Capital, Rishi Jaluria downgraded Palantir to Underperform, trimming his price target from $25 to $19. The analyst described Palantir’s share price valuation as ‘full’ and, like Mielczarek, expressed concern on whether the company would maintain its growth rate.
Jaluria also pointed to a decrease in government business and an increase in SPAC investments as areas of concern. On that last point, Palantir has pumped $400m into two dozen SPACs,according to Fortune Magazine. Get this right and Palantir is in on the ground floor of the next big thing in tech, while at the same time selling its analytics technology. But get it wrong and it looks like a bet that hasn’t paid off and will likely raise some shareholder eyebrows.
In a similar vein to RBC and William Blair, Citi also reiterated its Sell rating on the stock, saying slowing growth came ‘into the center’ during third quarter earnings. And while fourth quarter revenue outlook topped expectations, it still implied a slowdown in growth. Citi has a $18 price target on the stock, suggesting a marginal upside on Tuesday’s close.
Still Morgan Stanley’s Keith Weiss was more positive on the stock, upping his price target from $22 to $24. Weiss said that Palantir was able to beat expectations in the third quarter where it mattered, but, like other analysts, noted that growth was showing ‘signs of slowing underneath the hood’.
Where next for Palantir?
Despite the chorus of analysts pointing out flagging growth, there’s certainly some interesting strategic developments at Palantir. The company is entering into a joint venture with Germany’s Merck KGaA of Darmstadt, which supplies chemicals and materials used in chip manufacturing. The venture aims to improve supply chain efficiency by pulling in data from chemical and material suppliers along with data from chip factories. Merck is also making a $1bn investment to expand its US operations.
Growth could also come from Palantir releasing its Foundry software for cryptocurrency. According to Palantir, the software provides ‘industrialized compliance solutions” to crypto firms, leveraging its experience helping financial institutions spot money laundering and know your customer issues.
The bottom line is that yes Palantir’s growth has slowed down, but a 40% jump in sales for the year is nothing to be sniffed at. To get a better sense of where Palantir is heading, next quarter’s earnings will be pivotal. Should Palantir beat estimates, the stock - and faith in the company - could go up.
As it stands, Palantir’s share price has a $23.81 price target from the analysts tracking it on Yahoo Finance, suggesting a near 28% upside.
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