Palantir: Q2 Earnings Fail To Justify Share Worth (Score Downgrade) (NYSE:PLTR)

Thesis Abstract

Palantir (NYSE:PLTR) has reported Q2 earnings in keeping with expectations, however the inventory has dropped almost 10% to date.

Whereas the corporate has achieved its third consecutive quarter of profitability, progress has been lacklustre.

Wall Road analyst Dan Ives known as Palantir the “Messi of AI“, however just like the soccer participant, who signed a cope with Inter Miami price billions, this firm is overvalued.

As a Actual Madrid supporter, I could also be biased about Messi, however in the case of Palantir, I am setting my feelings apart.

Palantir’s inventory has greater than doubled its value within the final six months, and the valuation is just too wealthy. Moreover, a sell-off can be supported by technical evaluation.

I am altering my Palantir score from purchase to sturdy promote based mostly on this evaluation, however I will be very happy to purchase extra Palantir shares as soon as we attain the $10 space, as I nonetheless imagine within the long-term story for Palantir and AI.

Q2 Earnings Overview

One other quarter has flashed by way of us, and we at the moment are midway by way of 2023. Palantir reported Q2 outcomes on August seventh. Whereas these outcomes are roughly in keeping with expectations, I personally discover them disappointing, and I can’t proceed to justify the present share value.

As we will see within the monetary abstract, YoY progress got here in at a measly 13%. This, in my view, is fairly dangerous once we evaluate it to the expansion charges from final yr.

Granted, profitability has remained fairly good, with the Adjusted EBITDA margin reaching 27% and one other quarter of optimistic earnings.

Now, let’s take a look at a few of the investor slides to attempt to achieve some extra insights into these outcomes:

Within the Q1 presentation, we noticed an encouraging acceleration of US income progress, which climbed 26% YoY in the direction of $107 million. This quarter, we’re up 20% from final yr and down sequentially.

The silver lining right here is that Working Earnings continues to climb, even on a QoQ foundation. Palantir achieved 25% OI this quarter.

Lastly, it is also with mentioning that Inventory-Based mostly Compensation continues to development down. In Q2 of 2022 Palantir’s SBC had a price of $145 million, whereas this quarter it was $114 million. This has been a key contributing consider reaching GAAP profitability.

In conclusion, we will see a continued development of elevated profitability, however progress has been very disappointing. Even the US enterprise phase is struggling, and this truly flies within the face of the AI progress story.

Has Palantir’s progress peaked, or can we anticipate extra transferring ahead?

Karp’s Shareholder letter

Alongside the monetary outcomes, CEO Alex Karp issued his signature letter to shareholders.

Although I did not see encouraging monetary outcomes, Karp’s letter does have in it some bullish takeaways:

Just a few months in the past, Palantir launched its Synthetic Intelligence Platform, which guarantees to carry the ability of Massive Language Fashions to its current merchandise:

A scramble is going down all through the USA and world wide to deploy the software program options that can permit establishments to cultivate the massive language fashions which have up to now operated primarily within the wilds of the open web…We’ve constructed the combination platform that they require, and the traction we’re seeing, solely months after its launch, has been transformative for our firm.

Supply: Alex Karp, Letter to Shareholders

Based on Karp, Palantir is in discussions with over 300 corporations to deploy AIP. This ought to be a motor of progress for the long run. I will imagine it after I see it.

“We anticipate to stay worthwhile on each a quarterly and annual foundation this yr. In consequence, we anticipate that we’ll turn into eligible for inclusion within the S&P 500 after we report our monetary outcomes for Q3 2023 in early November. At that time, we can have been worthwhile on a cumulative foundation over the previous 4 quarters.

Supply: Alex Karp, Letter to Shareholders

On an excellent observe, if Palantir achieves its goal of remaining worthwhile over the approaching quarter, then the inventory could possibly be eligible for S&P 500 inclusion, which may act as a bullish catalyst.

With energy comes freedom.

Our board of administrators has authorised a standard inventory repurchase program, the primary in our historical past as a public firm. This system is allowed to repurchase as much as $1 billion of the corporate’s Class A standard inventory.

The size of the chance that lies forward has elevated considerably in latest months. And we intend to seize it.

Supply: Alex Karp, Letter to Shareholders

And it is also price noting that the corporate intends to repurchase $1 billion in shares. Nonetheless, I discover the final sentence considerably contradictory. If Palantir has such a big alternative forward of it, why is it repurchasing inventory as a substitute of reinvesting in itself?

Valuation and Technical Evaluation

Once I final wrote about Palantir, the inventory had simply launched Q1 earnings and its value was near $10. Since then, the inventory has virtually doubled, and the valuation does not make sense anymore:

Analysts estimate revenues will develop by shut to twenty% from right here till 2025.

First off, this appears optimistic, given the present development in earnings. Nonetheless, even when we do apply a beneficiant progress price, Palantir continues to be buying and selling at a 2025 P/S of over 12, which appears very beneficiant.

Nonetheless, I’ll say that Palantir appears lots much less overvalued if we take a look at one among my favorite valuation metrics. Worth-to-Earnings progress, or on this case, Fwd PEG:

Palantir presently trades at a 1.30 fwd PEG, which is definitely under the sector median. Nonetheless, honest worth can be a PEG of 1, which signifies that on the present value, PLTR continues to be round 25% overvalued.

On this scenario, fundamentals and technicals line up properly, as I additionally anticipate Palantir’s inventory to sell-off within the coming weeks:

As we will see within the chart above, Palantir’s inventory has reached a pure level of inflection. First off, our Elliott Wave rely, we’re nearing the two ext of our wave 1 measured from the underside of two. This may be an excellent goal to complete the five-wave impulse now we have been forming since we bottomed in December 2022.

A reversal round these ranges additionally is smart if we take a look at the VRVP: We’ve important quantity coming within the $22-$26 vary.

And eventually, we will see a bearish divergence within the every day RSI forming. I imagine we may see PLTR try another excessive into the $22 vary, with the RSI getting again close to overbought territory however additional confirming the bearish divergence (failing to make the next excessive).

If we measure the entire rally from the underside, the 50% retracement stage lands us a bit beneath $11. That is additionally simply above the 200-day MA, so I would anticipate this to behave as sturdy assist.

Takeaway

Palantir is a superb firm, little doubt, however the “Messi of AI” has come too far within the final three months. The inventory has doubled in value, and the latest earnings do not assist such a excessive value. Fundamentals and technicals line up right here, and although I nonetheless maintain a few of my Palantir place, I am trying so as to add extra on the dip.