We came across a bearish thesis on Palantir Technologies Inc (PLTR) on ValueInvestorsClub by Wells. In this article, we will summarize the bears’ thesis on PLTR. Palantir Technologies shares were trading at $21.40 when this thesis was published, vs. closing price of $31 on Aug 29.
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Palantir Technologies Inc., founded in 2003, has played a pivotal role in transforming how Western governments, especially the U.S., leverage data to enhance national security and operational efficiency. Known for its specialized software solutions, Palantir has been integral in high-profile operations, including the tracking of Osama bin Laden during Operation Neptune Spear and supporting the U.S. Army and Health and Human Services in various capacities. The company’s core products, Gotham and Foundry, are designed to integrate and analyze vast amounts of data from disparate sources, helping government and commercial clients make informed decisions. Palantir’s unique approach blends software with consulting services, embedding teams of engineers within clients’ organizations to tailor and optimize their technology solutions.
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Despite Palantir’s success in the government sector, the company’s commercial business is showing signs of weakness. While the government segment continues to grow steadily, with recent revenue up 13% year-over-year, the commercial side is struggling to keep pace with the lofty expectations set by investors. The commercial segment, which includes clients like PG&E and Ferrari, grew 23% year-over-year, but this growth is slowing, particularly in the U.S., where it dropped from 70% to 40% in just one quarter. This deceleration is concerning, especially as Palantir faces increasing competition in the enterprise AI space. The launch of Palantir’s Artificial Intelligence Platform (AIP) in June 2023 initially boosted the company’s commercial business, but the momentum has since waned, with competitors rapidly catching up.
The broader market’s expectations for Palantir are high, with the company’s stock price reflecting an optimistic view of its future prospects. However, the commercial segment’s underperformance suggests that these expectations may not be met. Palantir’s technology, while innovative, is no longer as differentiated as it once was, particularly in the commercial space, where competitors like Microsoft, Databricks, and Snowflake are making significant strides in AI and data management.
Valuation is another concern. Palantir’s stock is currently trading at high multiples, with a price-to-revenue ratio of 15.6x and a price-to-free cash flow ratio of 54.5x. These valuations are difficult to justify, especially given the slowing growth in the commercial segment. When considering the company’s intrinsic value, even generous assumptions about future growth and margins suggest that the stock is overpriced by as much as 30%.
PLTR is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 45 hedge fund portfolios held PLTR at the end of the first quarter which was 44 in the previous quarter. While we acknowledge the potential of PLTR as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as PLTR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
