Why Palantir Stock Is Down Today

What happened

Investors waiting for Palantir Technologies (PLTR -5.37%) to report a quarter with breakout growth are likely in for a longer wait, according to a Wall Street analyst. Given the uncertain economic environment, it appears fewer investors are willing to continue to wait. Shares of Palantir were down more than 5% on Thursday afternoon as Wall Street continues to shy away from more speculative growth stocks.

So what

Palantir has proven to be a vexing investment since its September 2020 initial public offering. The company’s data analytics tools are highly regarded, and its government business is credited with achievements including helping the Pentagon capture Osama bin Laden.

Investors bid the stock up by as much as 300% in its initial months as a public company, but in the last year Palantir shares have lost about three-quarters of their value. The issue has been questions about how fast Palantir will be able to grow, and how long until it is able to justify what was once a lofty valuation.

William Blair analyst Kamil Mielczarek is not expecting the current quarter to be the answer to investor prayers. In a research note out Thursday morning, Mielczarek says it appears Palantir had a “quiet” quarter in terms of government bookings. The analyst reaffirmed his underperform rating on Palantir, expecting a continuation of last quarter’s “sharp reduction” in revenue growth and margins.

Palantir has announced a number of commercial contracts; however, it is unclear how quickly revenue will ramp up on the commercial side.

Now what

Palantir is a special business with great technology. But investors want growth, and the jury is still out on whether Palantir will be able to generate the kind of growth that deserves a premium valuation.

Even with the stock’s decline this year, Palantir still trades at more than eight times sales. Government contracting rival Booz Allen Hamilton, which is growing slower than Palantir but has a long history of profitability, by comparison trades at about 1.5 times sales.

Given the power of Palantir’s technology and its superior growth numbers, investors are justified in assigning it a higher valuation. But it isn’t clear how much of a premium Palantir deserves, and if Mielczarek is correct and the current quarter fails to capture the imagination, the bull argument will become incrementally harder to make.

Lou Whiteman has positions in Booz Allen Hamilton. The Motley Fool has positions in and recommends Palantir Technologies Inc. The Motley Fool has a disclosure policy.