2023-11-07 10:00:00 ET
Summary
- We’re upgrading Palantir back to a buy.
- The stock underperformed S&P 500 by ~3% over the past 3M, and its 3Q23 results and 4Q23 outlook confirmed our thesis that the stock was overhyped on AI.
- We expect the current heightened counterterrorism environment could be a near-term catalyst for government revenue.
- We also expect its commercial revenues to continue to grow in 2024.
- We now think the stock can now outperform through 1H24.
We're upgrading Palantir ( PLTR ) to a buy. We now think our negative thesis of the stock being overhyped on AI has played out; 3Q23 results and 4Q23 outlook confirm our thesis is now complete. The stock underperformed the S&P 500 by ~3% over the past 3M. Now, we expect Palantir stock to outperform through 1H24, driven by heightened counterterrorism sentiment positively impacting government revenue and strong double-digit growth in commercial revenue. The following graph outlines PLTR stock against the S&P 500.
YCharts
We now see the stock recovering after the beat this quarter , with revenue up 17% Y/Y to $558M versus the consensus of $556.1M and EPS of 7 cents adjusted vs. 6 cents estimates. We believe top-line growth was supported primarily by stronger-than-expected revenue growth in its commercial segment, up 23% Y/Y, outpacing government revenue growing 12% Y/Y this quarter. The strong quarter was especially driven by US commercial revenue, which grew +33% Y/Y and 16% QoQ to $116M, signaling commercial spend is rebounding into 1H24. We're more confident that fundamentals are driving outperformance into 1H24 with management guiding for 4Q23 revenue at $599-$603M, compared to consensus at $599.26M, and raised FY23 guidance to $2.216-2.220B versus consensus of $2.21B and prior estimates of $2,180-$2,230M. The stock is up 14% over the past month, outperforming the S&P 500 by around 12%; we think the stock has hit its infliction point ahead of 2024 and now see more upside in 2024 for Palantir.
The following graph outlines PLTR's stock performance over the past month against the S&P 500.
YCharts
Commercial revenue outpaces government growth
We think commercial revenue will drive near-term outperformance and then expect government revenue growth to kick in. Consistent with our expectations, Palantir's $250M US Defense Department deal bodes well for its mid-to-long-term AI and ML capabilities but failed to boost near-term profits substantially. Instead, Palantir's government revenue growth slowed this quarter to 12% Y/Y versus last quarter, in which the segment reported 15% Y/Y growth ahead of commercial revenue's 10% growth. We think management's AIP go-to-market strategy will improve top-line growth towards 2H24 due to increased customer appetite for AI - driven data efficiency initiatives; management noted on the call that AIP boot camps allowed the company "to deliver real workflows on actual customer data in five days or less versus traditional pilots, which generally take one to three months." We think commercial revenue growth will sustain growth until government revenue reaccelerates; we think a rebound in government revenue growth will drive true and sustainable financial outperformance toward 2025. We think Palantir's government offerings are now better positioned to experience increased visibility and traction as the counterterrorism sentiment that management holds dear is heightened due to escalations in the Middle East. Management very clearly sides with Israel and Western allies in the conflict; hence, the increased U.S. budget for defense aid to Israel may be a positive for the company.
The following graphs outline commercial revenue versus government revenue growth in 3Q23.
Valuation
The stock is trading well above the peer group average, but we think the higher valuation is justified given the growth rate expected in 2024. On a P/E basis, the stock is trading at 63.0x C2024 EPS $0.29 compared to the peer group average of 87.7x. The stock is trading at 14.1x EV/C2024 Sales versus the peer group average of 7.5x. We recommend investors explore entry points into the stock at current levels, in spite of the higher valuation.
The following outlines Palantir's valuation against the peer group average.
TSP
Word on Wall Street
Wall Street is divided on the stock, leaning more toward a bearish sentiment. Of the 17 analysts covering the stock, five are buy-rated, six are hold-rated, and the remaining are sell-rated. We attribute Wall Street's mixed views on the stock to concerns over Palantir's higher valuation and near-term macro uncertainty. We understand concerns over one-quarter of increased commercial revenue growth not constituting a continued high double-digit growth in the segment, but we think management's higher guidance for next quarter, and FY23 confirms that commercial revenue is entering healthier levels into 2024.
The stock is currently priced at $18 per share. The median price-target is $17, while the mean is $15, with a potential downside of 10-16%.
The following charts outline PLTR's sell-side ratings and price-targets.
TSP
What to do with the stock
We're upgrading Palantir to a buy post-3Q23 results and outlook. We think our negative thesis about the stock being overhyped on AI played out over the past quarter, and we're now more optimistic about the company accelerating top-line growth driven by acceleration in commercial revenue in the near-term. We also think the current state of the Middle East is triggering a hyper-counterterrorism environment and could be a near-term catalyst for government revenue growth. We now think the stock can now outperform through 1H24.
For further details see:
Palantir: Upgrading To Buy, Positive In, Negative Out