Bears continue to see Palantir’s commercial growth as disappointing.
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Palantir Technologies shares are trading sharply lower Wednesday, reversing the earnings-driven gains of the previous session, as some analysts weigh in with ongoing doubts about the software company’s growth rate and valuation.
The key issue for Palantir (ticker: PLTR) continues to be investor discomfort with the company’s heavy reliance on the government sector for growth. While the split between government and commercial growth wasn’t nearly as stark in the March quarter as it was in December, bears continue to see commercial growth as disappointing.
Palantir shares were down 7.8%, at $18.63, in recent trading, while the S&P 500 was down 1.4%. The stock had rallied 9.4% on Tuesday.
Palantir posted impressive results overall. March-quarter revenue was $341 million, up 49% from a year ago, and ahead of the company’s own forecast of 45% growth. Adjusted operating margin was 24%, one point higher than guidance. Adjusted profits were four cents a share, in line with Street estimates. Adjusted free cash flow was $151 million, up $441 million from a year ago and way ahead of Wall Street’s forecast of a $28 million loss, giving Palantir an adjusted-free-cash-flow margin for the quarter of 44%.
The company said revenue was up 76% for its government business and 19% for its commercial business. In Palantir’s U.S. business, commercial revenue was up 72%, while government revenue was up 84%. Billings were $360 million, up 248%, while remaining performance obligations, an indicator of growth, were up 129%. For the second quarter, Palantir sees revenue of $360 million, up 43%, ahead of the previous Street consensus at $344 million.
Morgan Stanley analyst Keith Weiss writes in a research note that while the company this quarter was again driven by strength in the government business, “improving commercial customer adds, accelerated sales hiring and building commercial pipelines look to be the building blocks for more durable growth ahead.” But he adds that with the stock already trading at about 22 times estimated 2022 sales, the growth is already priced in. He maintains his Underweight rating and $19 target price.
Citigroup analyst Tyler Radke likewise repeats his Sell rating on Palantir shares, asserting that the company delivered a “smaller than typical revenue beat.” He adds that while there were “some encouraging early indicators” in the commercial business, overall commercial revenue growth “remains lackluster…and could take time to improve.” Adds Radke: “We still see a difficult set-up for the stock as growth decelerates in the second half and overall commercial revenue growth remains subdued.”
William Blair analyst Kamil Mielczarek remains bearish, too, keeping his Underperform rating. “While we are incrementally positive on shares following the 37% pullback over the past three months and the strong first-quarter results, we do not think the current growth rate is sustainable due to competitive pressure from enterprise data analytics providers and government software contractors,” he writes in a research note. “We continue to expect long-term revenue growth for the company to normalize in the 24% range that the company achieved from 2016 through 2019,” which would be below the company’s own forecast for 30% top-line growth. “Revenue deceleration will likely result in the revenue multiple compressing and further share downside.”
Goldman Sachs analyst Christopher Merwin is more upbeat, repeating his Buy rating, while trimming his target price to $30 from $34 to reflect multiple compression in the enterprise software group. “Going forward, we expect to see the commercial business accelerate, as Palantir continues to aggressively invest in sales headcount,” he writes. “Also, as international markets open up, and go to market partnerships further scale, we believe commercial trends should improve. We’re modeling 42% total revenue growth in Q2, up from 39% previously and 35% total revenue growth for the year, versus 33% prior.”
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