Morgan Stanley analysts have indicated that there is an "unfavorable risk-reward" scenario in Palantir (NYSE:PLTR) shares. As a result, the analysts downgraded the stock’s rating to Underweight from Equal Weight.
Palantir stock fell more than 4% premarket on the news.
This assessment comes in light of the current optimism surrounding the company’s AI product cycle and the valuation premium. The analysts have highlighted the challenge of low visibility regarding the monetization of AIP products.
Moreover, they note that the government segment does not seem likely to provide a counterbalance to these challenges. The analysts' perspective is further supported by their belief that current estimates already imply a re-acceleration in the second half of the year, which creates a high bar for PLTR to clear.
“Going forward, we believe the onus for stock outperformance shifts towards investors now looking for tangible revenue contribution from these Generative AI initiatives in the months ahead, an expectation which may be disappointed given Palantir's lack of a monetization strategy for AIP and the early stage of development of enterprise Generative AI solutions (slow conversion of proof of concept or POCs to production apps),” they said in a client note.
Overall, a more cautious stance is predicated on these 3 factors:
- Expected delays in AIP revenue contribution;
- Risk that the government business may not be able to offset a top-line deceleration; and
- A difficult setup into the 2H.
“While investors are near-term focused on a favorable event path which management has been talking about over several quarters – including GAAP profitability, S&P 500 eligibility, and large UK government contracts – we expect these could present potential 'sell the news' events as investor focus shifts back to the fundamentals as we surpass these events,” the analysts concluded.
Morgan Stanley’s new price target of $9 per share implies a downside risk of 45%.