Palantir Earnings Provide Litmus Test for 140% AI-Fueled Rally

(Bloomberg) -- Palantir Technologies Inc.’s premium valuation will be put to the test when the data analysis and software company reports results after the market close on Monday.Most Read from BloombergIstanbul Tries Free Public Transit to Help Job SeekersThe Answer To Making Cities More Family-Friendly? CourtyardsIs Denver’s Big Bet on E-Bikes Paying Off?In Warsaw, Falling Road Deaths Signal a Traffic Safety TurnaroundChicago Mayor Seeks Property Tax Hike, Breaking Campaign VowAfter a blisteri Read More...

(Bloomberg) — Palantir Technologies Inc.’s premium valuation will be put to the test when the data analysis and software company reports results after the market close on Monday.

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After a blistering artificial intelligence-driven rally of more than 140% this year, the bar is high. Wall Street has become increasingly cautious about Palantir, with the average target implying a decline of more than 30% in the next 12 months. At the same time, investors are still wary about AI-linked names, and want to see more tangible results from the nascent technology. Earnings from Amazon.com Inc., Microsoft Corp., Meta Platforms Inc. and Apple Inc. were met with mixed reactions.

“We cannot rationalize why Palantir is the most expensive name in software,” RBC analysts led by Rishi Jaluria wrote in a note last week. The stock trades at more than 100 times future earnings, while Oracle Corp. and Microsoft both trade at less than 30 times.

“Absent a substantial beat-and-raise quarter elevating the near-term growth trajectory, valuation seems unsustainable,” Jaluria said. RBC has an underperform rating and $9 price target for Palantir — about 80% lower than the current price.

Bullish investors see it differently, helping to push the stock to a record high last month. The company, which makes just over half of its revenue from government contracts, got a boost from its recent inclusion in the S&P 500, and is now the third-best performer in that benchmark in 2024 — trailing only Vistra Corp. and Nvidia Corp.

Palantir is “one of the few companies that is Gen AI enabled and has actually seen upticks both in the enterprise and government sector,” said Ted Mortonson, managing director at Robert W Baird & Co. “The Street is just missing, quite frankly, how powerful their core AI-based platform is.”

Palantir is expected to report third-quarter adjusted earnings per share of 9 cents, up 29% from a year ago, but a slower pace of growth than in previous quarters, according to data compiled by Bloomberg. Revenue is estimated at about $704 million, up 26% year-over-year.

Investors will be particularly focused on customer additions and sales of AI tools to corporate customers. Wall Street estimates revenue from government clients will grow 23%, to nearly $379 million, while commercial sales are expected to increase by about 32%, to $330 million. Palantir has won multiple new corporate clients this year, including CBS Broadcasting, General Mills Inc. and Aramark Services Inc.

“We’ve gotta continue to see that momentum,” in commercial contracts, said Mortonson.

Joe Tigay, portfolio manager at Equity Armor Investments LLC, is also focused on this metric. “They have really big name contracts, but they are really just scratching the surface in terms of the types of customers they can reach,” he said.

RBC’s Jaluria, on the other hand, is skeptical that Palantir can keep up the pace of commercial sector wins, given high levels of competition and considering the suitability of Palantir’s products outside of large, non-technical businesses.

The RBC analysts also note Palantir’s rally has been helped by a high proportion of retail investors — a crowd that could sour on the stock quickly, especially if the company doesn’t start returning meaningful capital to investors. Palantir doesn’t offer a dividend and, as of June 30, had $973.3 million of a total authorized $1 billion stock repurchase program available.

“With Palantir’s $4 billion cash balance, we think retail investors may be starting to become frustrated (rightfully so) by the company’s lack of willingness to return capital to shareholders given no apparent interest in pursuing M&A opportunities,” Jaluria wrote.

Tech Chart of the Day

Nvidia Corp. is threatening to reclaim the title of the world’s most valuable company from iPhone maker Apple Inc. The chipmaker’s shares are higher in premarket trading on Monday after the S&P Dow Jones Indices said on Friday that Nvidia will replace rival Intel Corp. in the Dow Jones Industrial Average. Meanwhile, Apple shares are lower after Warren Buffett’s Berkshire Hathaway continued sell the company’s stock in the third quarter. The spread between the two tech behemoths was about $50 billion as of Friday’s close.