What happened
A prominent Wall Street analyst is skeptical about how well Palantir Technologies (PLTR 0.44%) will be able to monetize its artificial intelligence (AI) platform, downgrading the stock as a result. Investors are taking notice, sending Palantir shares down as much as 10% on Thursday.
So what
Palantir, a one-time Central Intelligence Agency-funded defense contractor that also developed a commercial business, has built its reputation on its ability to organize and analyze massive amounts of data. The company of late has become a darling of investors seeking exposure to AI, sending Palantir shares up more than 130% year to date.
Morgan Stanley analyst Keith Weiss believes some of the euphoria is overdone. On Thursday, Weiss downgraded Palantir to underweight from equal weight and said the near-term optimism surrounding Palantir's AI product and the stock's valuation creates an unfavorable risk/reward setup for investors.
"While bringing product to market was enough to inspire investor optimism in the past six months, we see the focus shifting to investors parsing out the companies that can drive revenue from these offerings in the most timely and effective ways," Weiss wrote. "Palantir still appears very early as the company has clearly communicated that it has yet to determine a monetization strategy for its solution."
Weiss sees the company's government business, which is reliable but slower growing, as unlikely to offset any weakness on the commercial side.
Now what
Palantir has been public for only a few years, but its stock has been volatile from the beginning as enthusiasm about the company's potential has clashed with more modest actual results. As recently as November 2021, the company was guiding for annual revenue growth of 30% or greater through 2025, but its most recent estimates would imply just 16% growth in 2023.
The company today trades at 12 times expected sales and more than 50 times expected earnings, meaning there are a lot of future growth expectations baked into its valuation. If Weiss is correct and Palantir does have difficulty quickly turning its AI momentum into revenue and earnings, investors could be in for future disappointment.
