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Palantir: Risks Mostly Priced In, Catalysts Yet to Emerge, Says Morgan Stanley

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Prior to the recent market meltdown, a case could be made that many stocks are simply overvalued. However, the selloff for some names has been nothing short of brutal and demands some reassessment.

Take shares of Palantir (PLTR), for instance, which sit 70% below the all-time high reached at the start of 2021. The previous lofty valuation formed part of Morgan Stanley’s Keith Weiss’ bear case but the lowered multiple makes the stock a lot more palatable now.

That was not the only concern for Weiss. With Palantir heavily reliant on big government contracts and with those slowing down, Weiss was worried the revenue generated from the Commercial segment would decelerate too. Interestingly, that has played out as well, with the recent “slide” in core commercial revenue growth to 24% year-over-year (ex-SPAC). Another concern was centered around the “potential” for operating margins to drop from FY21’s peak levels of 31%. Palantir has guided for lower operating margins of 27% in CY22, so that has played out too.

Now, with all those risks “largely priced into the shares,” it’s time to reconsider. Accordingly, Weiss upgraded Palantir’s rating from Underweight (i.e., Sell) to Equal-weight (i.e., Hold). Interestingly, the price target comes down from $24 to $16. Nevertheless, there’s still upside of 44% from current levels. (To watch Weiss’s track record, click here)

So, what about the potential for a more bullish outlook? Here Weiss is looking for “better visibility into key catalysts necessary to getting the fundamentals and share price heading in the right direction.”

What are these? Basically, overcoming the concerns noted above.

One includes the “yield” of the commercial investments. “The ramp in sales headcount, increasing modularity in the solution portfolio and a less adversarial relationship with corporate IT are all important investments necessary to supporting more durable commercial growth longer-term,” Weiss expounded.

Evidence the government business has become “unstuck,” and a “sustainable level” of operating margins are vital too. “Confidence in the steady-state margin profile is key to understanding EPS growth longer-term,” the 5-star analyst further explained.

Turning now to the rest of the Street, where Weiss’ current take is the most popular; based on 4 Holds, 3 Sells, and 1 Buy, the stock makes do with a Hold consensus rating. Going by the $13.57 average target, shares are expected to climb 25% higher in the year ahead. (See Palantir stock forecast on TipRanks)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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