Today, shares of Palantir (NYSE:PLTR) closed down 7.1% after an analyst at RBC Capital downgraded the company to underperform from sector perform. The price target was also lowered from $25 to $19. PLTR stock’s volume at the time of writing is 85 million shares, 55% more than the average daily trading volume of 37 million. When a stock goes down on heavy volume, it signifies that shareholders are rushing to sell out faster than buyers can bid up the price.
Palantir reported a revenue beat yesterday, so why exactly is the stock being sold off and downgraded?
It seems investors in PLTR stock looked beyond revenue growth to rationalize the health of the company. While Palantir’s revenue grew 36% year over year, there were a few concerning points to note.
First, Palantir has invested in many SPACs that helped boost revenue during the third quarter. The sustainability of revenue growth through these SPACs is extremely questionable, and not related to the core business. Commercial revenue for Q3 would only be up an estimated 22% YOY when excluding SPAC growth. This is a slowdown from Q2’s 25% commercial revenue growth.
Secondly, revenue from the government sector slowed down considerably from Q2 to Q3. RBC Capital analyst Rishi Jaluria stated that “We believe Palantir got direct benefits from Covid-related spending and those benefits have already faded.”
Finally, Palantir trades at an extremely high valuation. The price-sales (P/S) ratio is 27, and Palantir is not yet profitable. Any earnings short of fantastic would be a catalyst for PLTR stock to drop.
PLTR Stock Price Predictions
Palantir is currently trading at $22.52. Where will the stock go from here?
- Jefferies has a $31 price target. Analyst Brent Thill noted that Palantir beat expectations on both top- and bottom-line growth. Thill was happy with the company’s backlog, but was concerned by the deceleration of government business and its valuation.
- Morgan Stanley has a $24 price target. Analyst Keith Weiss is mainly concerned about the slowdown in revenue from the government and commercial sector.
- Deutsche Bank has a $25 price target. Analyst Brad Zelnick stated that “While we appreciate Palantir’s strong technology platforms, mission-critical applications, and the robust market demand for AI/Analytics, we are concerned on several fronts including the sustainability of pricing, ability to penetrate down-market, and ultimately the long-term economics of the business.”
- Wolfe Research has a $20 price target. Analyst Alex Zukin pointed out that total revenue excluding SPAC investments was only up 29% YOY. Zukin is “not yet comfortable assigning a similar confidence interval and multiple to SPAC-based commercial revenue.”
- Citi has an $18 price target, the lowest target on Wall Street. Analyst Tyler Radke cited that the slowdown in growth “came into center view” during the quarter, along with weakness in the government and commercial sector.
- The average price target from 8 firms covering Palantir is $24.04
On the date of publication, Eddie Pan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.