Palantir Is Stuck in Worst-of-Both-Worlds Bind With AI, Software

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(Bloomberg) — It’s been a sobering stretch for Palantir Technologies Inc. shareholders, who have watched their once high-flying positions lose more than 40% of their value since the stock hit a peak in November.

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Strong results when the company reports its second-quarter earnings after the bell on Monday could reverse that trend. But Wall Street pros aren’t exactly betting on it.

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“It will have to be a really good quarter for the stock to stay afloat,” said Luke Rahbari, chief executive officer of Equity Armor Investments, which holds Palantir. “The question is, how much does Palantir have to hit it out of the park for the stock to go back up the way it used to? Is that kind of revival even possible, with sentiment so negative?”

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The thing is, Palantir is already expected to knock these earnings out of the park. The data-mining software developer is projected to post a 143% rise in net income for the second quarter on an 80% leap in revenue. The company also builds artificial intelligence platforms, and its free cash flow, an increasingly important metric for AI firms, is seen doubling to $1 billion.

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Still, investors are skeptical that this will be enough to change the narrative around the stock.

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“Everything is uncertain and feels negative,” Rahbari said. “Palantir would have to really charm me for me to want to be adding here. It would have to meet all the numbers and give really good guidance. Both sides of the story — the fundamentals and the valuation — are facing a lot of scrutiny right now.”

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Palantir’s stock market valuation is something of a puzzle. On the one hand, it has gotten significantly cheaper during the selloff. The shares are priced at roughly 67 times earnings projected over the next 12 months, down from a high of 247 on Oct. 31 and below their five-year average of 98. However, that still puts the company among the 15 most expensive members of the S&P 500 Index. And based on price-to-sales ratio, it’s the most expensive stock in the benchmark.

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That dynamic, where the shares are getting less expensive but aren’t close to what anyone would call cheap, is why these earnings really matter — and why so many investors are unsure they’ll make a difference for their positions.

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“We’re in a damned-if-you-do, damned-if-you-don’t situation this earnings season,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott, which owns Palantir shares. “If you miss, obviously you’ll see your stock plunge. But even if you deliver good results, I’m not sure that will be enough to satisfy the shift in sentiment.”

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Of course, there are still plenty of Palantir bulls on Wall Street. Of the 33 analysts tracked by Bloomberg who cover the stock, 22 have buy ratings. Its consensus price target of $189 implies that the shares will rise more than 50% over the next 12 months.