Palantir (PLTR) is a software company with several differentiating characteristics. For one, it has high exposure to the public sector, generating most of its revenue from big government contracts. What this also results in is a heavy reliance on just a handful of customers. Its software and services segments are tightly correlated, and in fact, the company does not divulge the breakdown between software revenue and services revenue. Additionally, its contracts are cancellable.
“This doesn’t make it a bad business,” says Deutsche Bank’s Brad Zelnick, “But the lack of transparency to mix and degree by which stock compensation flatters profitability, both limit our confidence in the long-term economics of the business.”
Of course, the big data specialist boasts some unique attributes, its “strong technology platforms, and mission-critical applications,” are well-suited for the needs of big organizations. Zelnick believes the public sector represents an $84 billon opportunity, as through 2025, it grows at a mid-single-digit CAGR. There is also healthy market demand for AI/Analytics.
However, apart from the aforementioned issues noted by Zelnick, there are several other areas of concern including the “sustainability of pricing, and the ability to penetrate down-market.” The latter is especially pertinent as Palantir’s offerings are aimed at the very high end of the market. As such, Zelnick thinks the commercial opportunity is “likely smaller than most appreciate.” This line of thought is given credence by the fact that 17 years since its founding, Palantir still only has a total of 169 customers.
Capturing spend from large companies is in no way a given either due to the company’s proprietary platform, with Zelnick’s checks with CIOs showing a preference for open platforms as the “democratization of data has become a key priority for many.”
“We therefore believe that Palantir is further penetrated into its commercial market than many appreciate,” the 5-star analyst summed up. “There is no doubt still room for Palantir to grow in the near term, but we question how sustainable that growth will be.”
To this end, Zelnick initiated coverage of Palantir with a Hold rating and $25 price target, suggesting shares have 4% downside from current levels. (To watch Zelnick’s track record, click here)
The Street’s overall sentiment is even more bearish; the analyst consensus views this stock as a Moderate Sell, based on 3 Sells and Holds, each, plus 1 Buy. going by the $24.33 average price target, shares are anticipated to be changing hands for an 7% discount a year from now. (See Palantir stock analysis on TipRanks)
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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.
