Morgan Stanley Downgrades Palantir, Says Risk/Reward Paradigm Shifts Decidedly Negative

After being called out by short seller Citron last week as a "full casino," Palantir Technologies Inc PLTR is facing further negative headlines.

The Palantir Analyst: Morgan Stanley analyst Keith Weiss downgraded Palantir from Equal-weight to Underweight and lifted the price target from $15 to $17.

The Palantir Thesis: Since Palantir's direct listing on Sept. 30, the company has seen a unique combination of revenue growth acceleration and rapid margin expansion, Weiss said in a note. The market was, however, undervaluing the company due to outstanding investor debates, primarily around whether Palantir was a 'true software company' or a less desirable consulting firm.

The 155% price appreciation since the direct listing has shifted the valuation gap to a large valuation premium relative to SaaS peers, Weiss said.

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The third-quarter results did highlight the sustained momentum in the government vertical, accelerating growth in the enterprise and record margins of over 25%. Much of the 75%+ move since the release of the third-quarter results in mid-November is likely due to factors outside of fundamentals, including long-interest squeezing strong institutional short interest, Weiss said.

Despite the re-rating, core investor debates and questions remain unanswered, leaving an unattractive risk/reward into 2021, particularly into mid-February as the lock-up agreement expires and frees up an incremental 1.8 billion in shares.

At current valuation levels, the firm expressed concerns over the impact of the cut in operating expenditure on growth, pace of customer acquisition amid the build out of the company's commercial distribution channel, modularity of the company's foundry, visibility into demand trends and the slowdown implied by the fourth-quarter guidance.

The risk/reward paradigm shifts "decidedly negative" for the stock, given the strong gains since listing with very little change in the fundamental story, the firm added.

PLTR Price Action: Palantir shares were slumping 14% to $22.18 at publication time.

Photo courtesy: Cory Doctorow via Flickr