Citi Kind of Downgrades Palantir

We touched $28 for the first time since 2021...

Welcome back to DailyPalantir! Yesterday we touched $28 for the first time since 2021 and got a downgrade that wasn’t really a downgrade…let’s discuss!

Citi Downgrade & Touching $28

Yesterday, Palantir hit $28 for the first time since 2021. Now last Friday, Palantir was up 5% and hit $27 for the first time since 2021, so in the premarkets on Monday, we were able to continue the momentum.

We closed yesterday at $27.70, above the previous 52-week high of $27.50.

Although the stock was up, we did get a “neutral” rating from Citi, which was upgraded from a sell rating, but wasn’t the most bullish:

Radkey's report suggests that while there are positives, there are also areas of concern that temper the overall bullish sentiment.

One of the key points from Citi's report is the go-to-market strategy for Palantir, which seems to be accelerating, particularly with the increased number of boot camps. This suggests that Palantir's commercial operations are growing well, with significant activity noted in their New York City office. The report acknowledges the improvement in commercial attendance, reaching pre-pandemic levels, which is a positive indicator for the company's commercial growth prospects.

However, Radkey expresses skepticism about the monetization of Palantir's AIP (Artificial Intelligence Platform). While the deployment of boot camps is increasing, Citi is unconvinced that this is translating into revenue at the same rate. This is a significant point because monetization is critical for justifying the current stock valuation and future growth. The market might be anticipating future monetization, but Citi's caution suggests that this is not guaranteed and is an area to watch closely.

Another concern raised in the report is about the sustainability of government growth. Even with recent substantial government contracts, Citi remains doubtful about continuous massive growth in this segment. The unpredictability and cyclical nature of government contracts make it challenging to rely on this revenue stream consistently. Despite recent acceleration from 11% to 16% in government business, Citi's hesitation indicates that investors should be cautious about assuming this trend will continue unchecked.

Finally, Citi's valuation concerns stem from Palantir trading at approximately 24 times its next 12 months' enterprise value to sales. This high multiple makes it difficult for Citi to identify positive near-term catalysts that would justify a higher stock price. While the market may be pricing in future growth and the potential for strong earnings, Citi's neutral stance highlights the risks associated with such a high valuation, especially if the anticipated growth does not materialize as expected.

My Response to Citi

In general, I think these concerns are valid, but I don’t think they are unique.

We know that Palantir’s government growth happens in cycles because of how the government procures software and we know that the deals Palantir has been getting (like the $480M Maven deal) have zero competition. If we assume the government is going to be spending more on AI, then Palantir will be a likely beneficiary of many of those deals. Additionally, on AIP monetization, the playbook has always been clear for this: provide value first, then get paid. I’d rather Palantir get hundreds of clients without nickel and dining them, show immense value, and then make dollars (not pennies) for the long run.

We need to become pivotal parts of every enterprise to make sure they stay with us forever, and that only happens from providing value. While that may not look good in the short term on numbers, if the thesis plays out, then the market will inevitably reward Palantir because the momentum is going to be there and reflect in top line revenue growth.

In terms of the argument on valuation, Citi makes a reasonable point — the core thing here is that the market is pricing in future growth, and if Palantir can deliver on that growth, they will be able to grow into the valuation and justify their current multiple if not expand the multiple.

Karp’s latest book

I discussed Alex Karp’s newest book yesterday on the newsletter briefly. Here’ my in depth thoughts about why this book matters, specifically for investors:

Scheduled for release in February 2025, this book is not just another CEO memoir but a deep philosophical critique of Silicon Valley's direction. Karp, who has a PhD in philosophy, is set to explore why Silicon Valley has turned away from national security projects to focus on consumer technologies, and why this shift is problematic for the future of the West. For investors, this book can serve as a vehicle to elevate Palantir's profile and clarify its mission.

The book matters for investors because it has the potential to broaden awareness of Palantir and its core values. By highlighting Palantir's commitment to national security and tackling significant global challenges, the book can attract a new audience of investors who resonate with these values. It helps to frame Palantir not just as a tech company, but as a defender of Western values and a crucial player in the global technological landscape. This could differentiate Palantir from other tech companies and position it as a unique investment opportunity.

Marketing Palantir

Karp's book is also an indirect marketing tool for Palantir. As the book gains traction and visibility, it will likely draw attention to Palantir's work and its underlying philosophy. This increased visibility can drive interest from both individual and institutional investors who may not have previously considered Palantir. The narrative Karp presents could resonate with a broad audience, potentially leading to increased investment as people align with the company's mission and vision.

Additionally, the book can provide deeper insights into Karp's leadership style and strategic thinking. Investors often look for strong leadership when deciding where to place their money. By articulating his thoughts on technology, security, and the future of the West, Karp can instill greater confidence in his leadership among current and potential investors. This can strengthen investor relations and support Palantir's stock in the long term.

Timing of the book release

The publication timing is also strategic. As the book is set to release in early 2025, it aligns with a period when Palantir might be looking to expand further into various markets, including commercial and defense sectors. The buzz generated by the book can complement these efforts, providing a boost in visibility just as Palantir might be making significant business moves. This synergy can enhance investor sentiment and potentially drive stock performance.

Karp’s book can also serve as a counter-narrative to critics of Palantir and Silicon Valley. By addressing common criticisms head-on and presenting a well-argued defense of Palantir's business model and ethical stance, the book can help mitigate some of the skepticism and negative sentiment that occasionally surrounds the company. This can reassure investors and potentially attract those who were previously hesitant.

Attracting long term investors

Moreover, the book’s intellectual and philosophical approach can attract a more thoughtful and long-term investor base. Those who are drawn to Karp’s deep thinking and philosophical perspectives are likely to be investors who understand and appreciate the long-term vision of Palantir. This can lead to a more stable shareholder base, less prone to short-term trading and more committed to holding the stock through its growth journey. At it’s core, Karp is going to get more people interested in the philosophy of Palantir, which should create shareholders that believe in something for the long run, not just something where they can make a quick buck.

Finally, the book’s release can stimulate discussions and debates within the broader tech and investment communities about the role of technology in society and national security. Such discussions can position Palantir at the forefront of these important conversations, reinforcing its relevance and importance. This can create a positive feedback loop, where increased attention and debate further elevate Palantir's profile, attracting even more investor interest and support. Imagine Karp going on a speaking tour and attracting audiences across the world with his ideas…there is a serious argument that the book release can help propel the brand distribution of Palantir at scale, so we’ll see how the roll out happens early next year.

That’s it for today - see you tomorrow!

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