Palantir isn't the 'cutting-edge' AI play it aims to be: Analyst

Palantir (PLTR) shares are sliding in after-hours trading even after the tech company raised its full-year guidance. RBC Capital Markets Software Equity Analyst Rishi Jaluria joins Yahoo Finance to break down Palantir's first quarter earnings and the market's reaction amid an artificial intelligence race.

Palantir topped its first quarter sales expectations yet saw a decrease in US commercial growth from 70% to 40%. Jaluria attributes the slow US commercial growth to Palantir's status as an "over-hyped generative AI beneficiary company," pointing to mixed messaging around its artificial intelligence capabilities and skepticism over its boot camp strategy.

"Everyone wants to play the AI game...I just don't think Palantir is that cutting-edge generative AI company that they claim it to be," Jaluria warns, pointing to more established tech companies like Microsoft (MSFT) as a stronger option.

For more expert insight and the latest market action, click here to watch this full episode.

This post was written by Melanie Riehl

Video transcript

Shares of Pal Anders sliding after hours after reporting first quarter earnings despite the company beating on the top line and raising its full year guidance for more.We're bringing in now Rishi, Juria software equity analyst at R BC Capital Markets, Rishi, it is always great to have you on the show.So let's walk through this Rishi.So PTY reports, they beat sales estimates that looks like for Q One Rishi, they raised their forecast for annual revenue initial pop, but now we're down here about 9% in the after hours.What is going on here, Rishi?Give me, give me your take.Yeah, absolutely.And Josh thanks so much for having me.Always a pleasure to speak to you.Um I I would say it's a combination of a couple of things, right?It's, it's high expectations because this has become AAA he or in my opinion, overhyped uh generative A I, you know, beneficiary company and we can get into that in a second.You know, you saw the stock was up 8% on the day today heading into earnings and then, you know, they put up results that are beaten raise, but I think that was priced into the stock and then at the same time you see, uh us commercial decelerating, uh pretty, pretty big.Um, you know, last quarter they put up 70% us commercial growth now they're growing us commercial 40%.I think it's a combination of those as well as some, some other things that's leading the stock down about 9% of the aftermarket.Richie Julie here.Why is that commercial growth slowing?Is it just a matter of that?They couldn't keep up that same pace or is there some issue with execution or is it and market demand, what's going on?Yeah.Um I, I think it's a couple of things, right.Number one is the compare itself just gets a little tougher.I think that 70% commercial number that they posted last quarter was maybe boosted by just a very, very easy compare and some one time uh impacts.And so that's piece number one, I think piece number two and, and we'll see how this plays out over the coming quarters.But when we talk to actual technologists who are deep into A I deep into ML who know more about this topic than I could ever hope to over my life.They are expressing skepticism around Palantir and, and especially around A IP and whether they are what they say they are from, you know, in an A I perspective and maybe there's a little bit of that showing up in, in the US commercial numbers and, and why we're seeing that slowdown as well.What about uh Rishi, this company is uh boot camps where they get customers, you know, kind of up and running fast with their A I software smart strategy, in your opinion.I think it is.But uh look, I would, I would again put a little bit of skepticism around that boot camp strategy.I think number one, remember Palant Tier is very heavy customized software, right?I estimated more than 30% of their business is actually uh professional services and outsourced data science rather than actual true software.So I don't know that it's even the right fit for something like a boot camp.And even then if we really think about uh boot camp customers, these are people who ok, you know, come and figure out some of my problems and give me a use case, but it doesn't go from there to a customer becoming a multimillion dollar pent to your customer overnight, which is how they make it sound on earnings calls.But, but in reality, a lot of times those boot camp customers might do multiple boot camps or they might turn into a pilot customer over time.It's not nearly the game changing to a game changer to go to market that, that I think they claim it to be um Rishi.So obviously you, you're not a fan, you've got an underperform on the shares here.Um We see it coming back to earth today, but you know, the market has not been on your side thus far.This year, there has been, the stock has rallied there.Um definitely are a lot of palun buyers out there.Where do you think this sort of disconnect lies between that perception of Palantir as an A I winner and what you're saying, which is that in truth, it, it might not be.Yeah, I, I think it comes down to that perception around exactly what is Palant is exactly what is A IP because there is no way the valuation of Palant your stock at, you know, 25 times forward revenue is supported by 20% growth and, and, and the margins that they're putting up that that's just not possible if you compare it to what all other things in software are trading.Um What I think it comes down to is volunteer messages that they are this cutting edge generative A I company, they message around a lot around A IP and boot camps and I think very deliberate target retail investors.Um and, and look, everyone wants to play the A I game and, and don't get me wrong.I'm a huge believer in A I and especially Gene A I's technology.I think it is going to change society as we know it.I just don't think Palant is that cutting ja I company that they claim it to be.I think it is a good data pipeline.It is a good data ontology company.I'm not saying it's not a useful company but it is not what they claim it is.And I would say to any investor that really wants to play this A I trend by Microsoft.Um You know, they are doing a lot more when it comes to generative A I plus, they have that very deep partnership with open A I, which to me is one of the most important companies in the world today.Um I, I think Microsoft is a much better way to play the A I wave uh than Pune and Palun Rich.You know, we're talking A I they commercial business, but of course, you know, the company's roots are in government sales.I'm just interested for that business segment.Rie, look ahead, what do you see puts and takes any tail winds that you see ahead?You know, I think there's really some interesting puts and takes here, right?Because what we picked up in our checks and our conversations is that government agencies are actually looking to reduce their dependency on Pune and maybe multi source and use multiple vendors, which is, you know, what we saw in the UK with the NHS deal where they actually end up using a number of different vendors instead of palun and the deal ended up being a much, a lot smaller for Palantir than expected.And so I think there actually could be a little bit of mixed results in the government business over the next couple of years as a result of this.Um you know, I will also say, you know, the, the government business is probably the sticky, better quality business for pal, but it's not a high growth business.And I think that's why they don't emphasize it nearly as much as they do the US commercial business.