2023-08-02 09:51:57 ET
Summary
- Palantir Technologies Inc. is set to report Q2 earnings on August 7, 2023, and shares have seen massive share price appreciation lately.
- While Palantir had some achievements such as reporting GAAP and GAAP operating income profitability, investors appear very bullish.
- Palantir's share price has risen by more than 200% in 2023, and it may be a good time to take profits and sell.
- Palantir is now trading at a P/S ratio twice its 1-year average P/S ratio, which translates into an unattractive risk profile.
Palantir Technologies Inc. ( PLTR ) is set to report second quarter earnings post-market on August 7, 2023, and shares have seen positive momentum in recent days after Wedbush Securities cited Palantir's AI potential and issued a $25 price target. While I expect a strong earnings release from Palantir next week and quite possibly a third consecutive GAAP profit, I believe that all the good news that could come out of the firm's earnings report next Monday is already priced into Palantir's valuation at this point. Since Palantir is also looking back to a more than 200% share price return in 2023, I believe it makes sense to take profits and sell into the current strength!
Previous PLTR rating and rating adjustment
I previously (in June) rated Palantir as a strong buy -- Palantir and AI: A Match Made In Heaven -- citing the powerful AI theme as well as integration potential of AI-powered analytics solutions with Palantir's Foundry platforms that help companies aggregate and analyze large amounts of data. Since Palantir's share price has risen significantly in FY 2023 and investors appear overly optimistic about the Q2'23 report, I believe Palantir's valuation now fully reflects its potential in the AI market. As a result, I am downgrading to sell!
Good news from Palantir's Q2'23 earnings report likely already reflected in the firm's valuation
Palantir is due to report earnings for its second-quarter on July 7, 2023, and both investors and analysts are heading into the earnings report with high expectations. Analysts expect $0.05 per share in adjusted earnings as well as a third consecutive GAAP profit for the software analytics company. Ahead of the earnings report, upward EPS revisions outnumber downward EPS revisions by a ratio of 5:1.
One key reason behind the strong share price revaluation of Palantir in 2023 is that the company has guided for a GAAP profit in FY 2023 which drastically improved the appeal of Palantir for investors, despite an overall deceleration of its revenue picture. Palantir has achieved losses on a GAAP basis for most of its existence and only in Q4'22 managed to report its first GAAP profit ever. The firm subsequently reported a second consecutive GAAP profit in Q1'23 and guided for a GAAP profit on a full-year basis as well.
Additionally, in Q1'23, Palantir hit another milestone: it reached its first-ever quarter of GAAP operating profitability with earnings of $4.1M.
The improvement in the earnings picture has been driven chiefly by strong acquisition momentum even at a time of decelerating revenue growth. Palantir has especially been crushing it in the commercial segment, which is where the firm continued to sign up a significant number of new clients in the last year. In Q1'23, Palantir had 280 total customers in its commercial practice, showing an increase of 52% year over year. For the second quarter, I would expect continual acquisition momentum and improving customer monetization as well.
Despite solid upside momentum in earnings, strong execution in the commercial segment and the guidance for positive GAAP net income in FY 2023, I believe the firm's risk profile has deteriorated after a more than 200% increase in total returns in FY 2023. While I still like Palantir and especially the potential that comes with the integration of AI-powered solutions into its software platforms, the valuation is no longer attractive, in my opinion. Investors also appear exuberant after Wedbush Securities' comments, which I consider to be a warning sign as well.
Palantir's valuation is now high relative to its history as well as rivals
Palantir's shares soared more than 11% at the beginning of this week after positive comments about the company's artificial intelligence potential by Wedbush Securities. Palantir's share price has seen massive appreciation this year, and with optimism ahead of Q2'23 building, I believe it is a good time to sell.
Shares of Palantir are now also expensive, based off of expected revenues. Palantir has a price-to-revenue ratio of 16.1X… which marks a 1-year high and is nearly double the 1-year average P/S ratio of 8.1X. Other AI stocks, such as Splunk ( SPLK ) or C3.ai ( AI ), also trade at healthy revenue multipliers, but Palantir is by far now the most expensive software/analytics company in its industry group.
Risks with Palantir
Issuing a sell recommendation after a strong run-up in price obviously exposes me to a timing issue: if Palantir reports strong Q2'23 earnings -- robust operating income, a third consecutive GAAP profit, strong customer acquisition in the commercial segment due to AI integration into its Foundry platforms -- Palantir's share price could run even higher in the short term. Given the massive change in Palantir's valuation picture since the beginning of the year and since my last recommendation, I am willing to take this risk and change my rating to sell prior to the release of second-quarter earnings.
Closing thoughts
While I still believe that Palantir has strong potential in the artificial intelligence market and could combine its core Foundry services with AI-supported predictive analytics -- which is a growing market -- shares of Palantir have already seen a major re-rating ahead of the Q2 earnings report… which leads me to believe that most of the positive news that could come out of it are likely already reflected in Palantir's valuation. As much as I like Palantir's long-term potential in the AI market, I believe investors may want to think about selling into the strength and securing profits ahead of the company's Q2'23 earnings report!
For further details see:
Palantir: Be Fearful When Others Are Greedy (Rating Downgrade)