Investors seem to have given a poor reception to Palantir Technologies’ (PLTR) upbeat fiscal Q3 results. Shares of PLTR have been in a free fall, tanking 13% in the past five days.
The company’s revenues soared 36% year-over-year to $392 million, handily beating analysts’ expectations of $385.02 million. It is important here to note that Palantir primarily earns revenues from the sale of subscriptions that provide access to its software in a hosted environment, like Palantir’s cloud-based services or through on-premises software and professional services.
When it comes to Q4, Palantir anticipates revenues of $418 million and an adjusted operating margin of 22%. Over the long term, PLTR continues to expect revenue growth of 30% or more from 2021 to 2025. (See Top Smart Score stocks)
The strong revenue outlook and fiscal Q3 results notwithstanding, let’s look at what has William Blair analyst Kamil Mielczarek concerned.
Downtick in Customers
Palantir primarily caters to commercial and government customers. It is the deceleration in growth in revenues from its government customers that has Mielczarek worried.
The company’s fiscal Q3 revenues declined quarter-over-quarter to $232 million, a deceleration from a year-over-year growth rate of 66% in Q2 to 34% in Q3.
Analyst Mielczarek noted that while the company’s management did not provide any revenue guidance regarding its contract from the U.S. Army, Mielczarek would not be surprised if “CD2 becomes an annual contract of approximately $40 million to $75 million per year.”
Heavy Reliance on Strategic Investments
Moreover, the analyst noted that Palantir’s growth in the second half of this year relies heavily on strategic investments; in the first nine months of this year, PLTR recognized $22 million of contractual revenue from strategic investments.
According to Mielczarek, excluding these investments, “Palantir revenue growth likely decelerated to less than 30% year-over-year, below the company’s full-year and long-term growth targets.”
Moreover, the analyst noted that excluding strategic investments, the Q4 guidance “implies less than 25% year-over-year growth.”
As a result, Mielczarek remains “concerned about the business’s ability to maintain 30% organic growth over the near term,” and is bearish with a Sell rating on the stock.
Wall Street’s Take
Mielczarek acknowledged that the company has a unique solution that “has the potential to support growth rates” but noted “risks to achieving this growth rate that are not currently priced into the stock.”
The analyst listed out the risks for the stock and the “primary risk is that Palantir does not significantly accelerate its commercial revenue. Palantir has struggled to achieve the same type of hypergrowth for its commercial division that many of its data analytics peers have achieved.”
Interestingly, the bearish outlook aside, Cathie Wood’s ARK Invest upped its stake in Palantir to 1.9%, buying more shares after its Q3 results.
The rest of the Street echoes Mielczarek’s view and is bearish about the stock with a Moderate Sell rating based on one Buy, two Holds, and four Sells. The average Palantir price target of $22.83 implies that the stock is priced in at current levels.
Disclosure: At the time of publication, Shrilekha Pethe did not have a position in any of the securities mentioned in this article.
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