Evaluating the Potential for Palantir Stock Amidst Renewal Uncertainties

Palantir Stock

After an impressive 35% surge in November, Palantir Technologies (NYSE:PLTR) experienced a setback, plummeting over 9% and currently valued at a $40 billion market cap. This decline was accentuated by a bearish analyst note from William Blair’s Louie DiPalma, focusing on concerns related to a crucial Army contract.

Key Points from the Analyst Note

DiPalma highlighted Palantir’s four-year, $458 million contract with the U.S. Army, up for renewal this month. Due to disputes over data ownership, the renewal contract’s value could diminish significantly, as the Army seeks diversification across multiple vendors. Government contracts constituted 55% of PLTR’s Q3 sales, a figure that might dwindle if other agencies reduce reliance on Palantir.

Reiterating an “underperform” rating, DiPalma pointed out PLTR’s 125x future cash flow valuation, predicting a compression in its multiple due to competitive pressures for new defense contracts.

Performance and Outlook

Despite recent challenges, Palantir stock has outperformed markets in 2023, boasting a 185% year-to-date increase. Its success is attributed to a strong presence in artificial intelligence (AI)-driven enterprise software, contributing to robust top-line growth and expanding profit margins.

In Q3, Palantir reported a 17% YoY increase in sales to $558 million, with a net income of $72 million. Its net income over the last 12 months reached $147 million, making it eligible for S&P 500 inclusion. Revenue growth was propelled by a 33% increase in U.S. commercial contracts, driven by the demand for its AI platform released in early 2023.

Target Price and Analyst Recommendations

Despite the impressive 2023 performance, Palantir stock trades 145% below its all-time highs. It is expected to achieve adjusted earnings of $0.29 per share in 2024, resulting in a forward earnings multiple of 63.5—a steep valuation, especially if government contract values decrease.

Out of 14 analysts tracking PLTR, only two recommend “strong buy,” one suggests “moderate buy,” five advise “hold,” one proposes “moderate sell,” and five advocate “strong sell.” The average target price is $14.65, 20% below the current levels. RBC Capital presents the most conservative estimate, with a Street-low target of $5.00, nearly 73% below current levels. This view is influenced by concerns over a recent NHS contract, perceived as “underwhelming” due to its smaller-than-expected size and split nature among multiple vendors.

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