Palantir Stock Is Facing Many More Hurdles Than Just Overvaluation

With Wall Street seemingly souring on Palantir (NYSE:PLTR), the company lacking a solid competitive advantage, and the shares continuing to trade at a huge valuation, I remain bearish on Palantir stock.

A banner for Palantir (PLTR) hangs on the New York Stock Exchange.

Source: rblfmr / Shutterstock.com

In recent weeks, Morgan Stanley and Credit Suisse have dropped Palantir to the equivalent of “sell” ratings. Meanwhile, short-seller  Citron also issued a negative note on Palantir and announced that it was shorting the shares.

On Dec. 2, Morgan Stanley cut its rating on Palantir stock to underweight from equal weight noting that the shares were trading at a significant premium to its competitors, the firm said that the stock’s gains had not been accompanied by any major developments in the company’s outlook.

The firm also called the shares unattractive and said that investors differ on whether Palantir is a software maker or a less appealing consulting company.

 

Morgan Stanley did, however, raise its price target on Palantir to $17 from $15. Still, with the shares currently trading around $25, that’s hardly a ringing endorsement.

Also concerned about the stock’s valuation was Credit Suisse, which, on Dec. 18 cut its rating on the shares to underperform from neutral. Given the high valuation, the firm warned that its risk/reward outlook was skewed to the downside, while they were failing to reflect multiple risks.

Finally, Citron on Nov. 22 set a year-end price target of $20 on Palantir stock, according to Business Insider.  Calling the shares “a full casino,” Citron noted that it was shorting the stock.

Looking Back at Palantir Stock

In my previous column on Palantir, published on Dec. 11, I warned that the company could very well face tough competition going forward. In preparation for today’s article, I searched for one or more competitive advantages that could set Palantir above other data-analysis and consulting firms.

Unfortunately for the owners of the stock, after looking through the company’s website and the transcript of its third-quarter earnings conference call, I wasn’t able to find any compelling competitive advantage that the company has.

Like other companies that provide data-analysis tools, including Splunk (NASDAQ:SPLK) and Salesforce’s (NYSE:CRM) Tableau, Palantir says that its products are easy to use and provide valuable insights that save a great deal of money.

I did not, however, see any indication that Palantir’s products have qualities that make them much more valuable than those of its competitors.

The only major attribute  that sets Palantir above Splunk and Tableau  is that Palantir seems to have much more experience working with government agencies.

However, as I discussed in my previous column, systems integrators that do have a great deal of experience working with governments, including Booz Allen Hamilton (NYSE:BAH), “sell data-analysis products to governments.”

Moreover, as I pointed out in the last article, these systems integrators could eventually partner with Splunk and its competitors and/or acquire them.  Consequently, I believe that Palantir’s experience of working with governments will prove to be of limited value over the longer term.

Valuation PLTR Stock

Even though Palantir’s shares are down nearly 30% from their 52-week high of $33.50, the stock still has a very large forward price-sales multiple of 33.

Moreover, as I discussed in my previous column, given the Biden administration’s emphasis on domestic priorities and government’s limited spending power amid the coronavirus pandemic the company is facing many political hurdles in 2021 and subsequent years.

And after factoring in the company’s tough competition, its lack of strong competitive advantages, along with Wall Street’s worries about the shares’ high valuation, and it’s impossible to recommend buying PLTR stock at this point.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.


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