Palantir: This deep withdrawal is a gift from the market (NYSE: PLTR)

Michele Vi

Thesis

We highlighted in our post-earnings update that investors should benefit from the decline in Palantir Technologies Inc. (NYSE: PLTR) stock, although the market was concerned about the significant slowdown in its government growth rate.

However, PLTR was caught in the recent large market flow to the downside, sending it further to the downside as it underperformed the market. As a result, the PLTR was last trading close to June lows, offering investors another fantastic opportunity to rise more aggressively.

We are confident that the PLTR has already reached its long-term low in May, which should hold resiliently thanks to the recent pullback. Furthermore, the rapid sell-off in the PLTR over the past month is consistent with moves to force capitulation for the weak hands that chased the summer rally.

Therefore, we urge investors to hold their positions firmly given the negative and more attractive valuation. Palantir may continue to experience short-term downside volatility given its downside momentum. However, we encourage investors to look forward. We assume that the re-acceleration in its revenue growth should increase buying sentiments and its operating leverage.

As a result, we infer that the stars are practically aligned for investors to consider adding more exposure, riding the potential next wave with the broad market.

Too scary, but Palantir’s assessment held up

Multiple PLTR TTM FCF

Multiple PLTR TTM FCF (koyfin)

The PLTR was last trading at a TTM free cash flow (FCF) multiple of 61.8x, close to the May lows. While it was still trading at a perceptible premium given its growth profile, that level was sustained robustly. As a result, the PLTR’s defeat of the August highs improved its valuation significantly, as it tumbled nearly 38% to its August lows. We assume that a further decline is unlikely, as Palantir is expected to recover its FCF margins during FY 24.

Consensus estimates of Palantir FCF metrics

Consensus estimates of Palantir FCF metrics (S&P Cap IQ)

Furthermore, even neutral consensus estimates suggest that Palantir’s malaise is not structural but likely transitory given the challenging enterprise IT environment in the first half 22.22. Palantir was also impacted by forex headwinds, given its exposure to US revenues of nearly 39% in the second quarter. Coupled with worsening macroeconomic difficulties in Europe, we believe investors have adjusted their expectations for Palantir’s pace of recovery during fiscal year 23.03.

As a result of the market and Street pessimism, Palantir would have much easier races to run in FY23. Also, as seen above, Palantir’s FCF growth is expected to reach a low in FY22 before rising 116% in FY23. Therefore, we are confident that these estimates suggest that Palantir’s competitive divide has not been eroded, but merely a momentary slowdown in deal closings.

Additionally, the Palantir platform has also demonstrated its effectiveness and capability in recent California wildfires. Major utility operators depended on Palantir’s platform to manage their risks. Citi (C) pointed out in a recent comment:

There is a lot to be done to mitigate fire risks. [Palantir] offers what it calls operational artificial intelligence to help manage complexity. Palantir’s technology even creates a meta-constellation of satellites that aggregates and analyzes images to help utilities and first responders. – By Barron

We believe Palantir’s unique role as a leading AI / ML platform has few close competitors. Forrester also confirmed our belief as he rated Palantir a clear leader in the Forrester Wave: AI / ML Platforms, Q3 2022. He emphasized, “Palantir is rooted in building data-driven intelligence applications for commercial use cases and complex and high-value government agencies. “

Therefore, we believe the momentum in those large contractual deals would increase for Palantir as macro headwinds subside. It is our belief that the headwinds to the economy have already reached their peak, as we explained in our recent articles on ProShares UltraPro QQQ ETF (TQQQ) and ARK Innovation ETF (ARKK). Therefore, we infer that the overall environment should be more favorable for high-growth stocks such as PLTR moving forward.

Are PLTR shares to be bought, sold or held?

PLTR Price Chart (Weekly)

PLTR Price Chart (Weekly) (Trading view)

PLTR’s price action remains constructively configured even as it approaches June lows. As seen above, PLTR’s rapid selldown has created a bear trap (indicating that the market has firmly denied further bearish sales), based on June lows.

Therefore, if PLTR can continue to build solidly over the next few weeks, we assume sellers are likely running out. However, investors are encouraged to take action given the potential to downside volatility.

Despite this, we like the price action, coupled with the oversold momentum indicators. Therefore, we postulate that PLTR is well positioned to stage its bottoming process, corroborated by our assessment of its valuation and the improvement in FCF profitability, as discussed above.

As such, we reiterate our Buy rating on PLTR.

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