We’re downgrading Palantir (NYSE:PLTR) from a buy to a hold post Q2 2023 earnings results. We think the stock ran up on A.I. hype in the first half of the year, up 167% YTD, outperforming the S&P 500 (SP500) by around 149%, and we see a less favorable risk-reward profile for the stock post run-up. We expect PLTR’s outperformance to moderate in the back end of the year, and we’re seeing revenue growth percentage slow this quarter and expect to see a slower growth rate continue into 2H23 due to macro uncertainty.
PLTR reported revenue up 13% Y/Y and 1.4% sequentially to $533M this quarter versus last quarter, where revenue came in at $525.19M, up 17.8% Y/Y. We think the slower revenue growth highlights that despite the strong A.I. growth exposure, the company is not immune to the current cost-cutting environment.
PLTR was quick to launch its Artificial Intelligence Platform, or AIP, this quarter – ten weeks ago, to be exact. While we do expect AIP to expand the company’s Serviceable Available Market, or SAM, in the mid-to-long run, we believe AIP has had a lackluster impact on revenues this quarter and attribute this to the weaker spending environment. On the earnings call, management emphasized that the AIP product reception was unlike anything seen before in PGE, Foundry, Apollo, and target selection. Still, we now don’t expect the company to experience a significant revenue boost from the platform in the near term.
Our downgrade is driven by our belief that the stock is currently overhyped on A.I. We published our buy rating on PLTR in February when the stock was priced at $8.47 since then, the stock reached 52-week highs of $20.24. The stock is up 97% since our February buy rating, outperforming the S&P 500 by roughly 85%.
We see a higher risk profile for the stock in 2H23 due to macro uncertainty pressuring commercial and government revenue. This quarter, government revenue, which accounts for roughly 57% of total sales, increased 15% Y/Y and 4% QoQ to $302M, largely driven by international government revenue, while US government revenue declined 2% sequentially to $225M. We’re seeing government revenue growth slow compared to last quarter, in which government revenue was up 20% Y/Y. We also don’t expect commercial revenue to offset softer spending in the government business; this quarter, commercial revenue grew 10% Y/Y to $232M but declined 2% QoQ versus a 15% Y/Y growth in 1Q23.
We think the weaker macro situation will impact PLTR and don’t believe this near-term headwind has been priced into the stock. We recommend investors wait for the macro weakness to be priced in before exploring favorable entry points into the stock to ride the upward trend in 2024.
The following chart outlines our rating history on PLTR.
In our last note in May, “Palantir: Pushing (Sustainable) Profitability With A.I. Boom,” we expected PLTR to continue to push profitability, and we’ve seen this play out in 2Q23 with this quarter marking the third consecutive quarter of GAAP profitability and a second consecutive quarter of GAAP operating profitability. Consistent with management’s expectations, we see PLTR achieving GAAP profitability each quarter this year but continue to believe macro weakness will weigh on commercial and government revenue in 2H23. We don’t think the macro weakness has been priced into the stock, and hence we recommend investors take a back seat on the stock for the near-term and wait for more attractive entry points as the stock is overpriced on A.I. hype at current levels.
PLTR stock is overvalued at current levels. On a P/E basis, the stock is trading at 65.1x C2024 EPS $0.26. The stock is trading at 12.6x EV/C2024 Sales versus the peer group average of 7.8x. We don’t think PLTR’s higher multiple is justified, even factoring in the company’s A.I. growth exposure.
The following chart outlines PLTR’s valuation against the peer group.
Word on Wall Street
Wall Street is more bearish on the stock. Of the 17 analysts covering the stock, three are buy-rated, seven are hold-rated, and the remaining are sell-rated. The stock is currently priced at $17 per share. The median sell-side price target is $15, while the mean is $14, with a potential downside of 15-18%.
The following charts outline PLTR sell-side ratings and price-targets.
What to do with the stock
We’re moving PLTR to a hold from a buy; we think the stock’s risk-reward profile is less attractive after the run-up on A.I. hype and amid macro uncertainties pressuring spending. We continue to expect PLTR to be uniquely positioned to outperform in 2024, but don’t expect the stock to work in the near-term. We recommend investors stay on the sidelines and explore entry points once the macro weakness has been priced in.