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Palantir (NASDAQ:PLTR) stock was dropped to underweight by Morgan Stanley, sending shares down 4% overnight.
Palantir was due to open this morning at around $15.69. This gives it a market capitalization of slightly below $35 billion.
In its downgrade, Morgan Stanley raised its price target on Palantir from $1 to $9 per share. But that still implies a price drop of over 40%.
Is Palantir AI?
The value of Palantir has doubled in 2023. Much of it is based on hype around generative artificial intelligence (). But the stock is still down 40% from the speculative highs of two years ago.
AI bulls like Cathie Woods’ ARK Innovation (NYSEARCA:ARKK), have bet big on Palantir this year. Wedbush analyst Dan Ives has boosted it on TV. TV analyst Jim Cramer has also endorsed it.
But Palantir is primarily a defense contractor, its growth limited by Congressional authorizations and defense bureaucracy. It reported year-over-year (YOY) growth of just 13% in its most recent quarterly report. Earnings were 1 cent/share. Management estimates 2023 revenue at $2.2 billion.
That means investors are paying 16 times revenue to own a company with growth in the teens and marginal profits. Palantir is trying to get contracts beyond the military and in the commercial sector. Bulls say it has cracked the code of high-end data analysis.
But is data analysis AI? Palantir CEO Alex Karp insists it is, calling his offering an “Artificial Intelligence Platform (AIP)” for health care, energy and manufacturing.
Palantir has made progress in areas like hospital scheduling. However, its software must be customized for each customer. It’s not a plug-and-play tool.
PLTR Stock: What Happens Next?
Stone Fox Capital has followed Morgan Stanley’s lead, praising the company while downgrading the stock.
At some point, hype must bow to financial reality. Palantir is not promising hyper-growth, only moderate growth with modest profits.
As of this writing, Dana Blankenhorn did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.