After the miserable bear market of 2022, tech stocks came roaring back last year. The tech-loaded NASDAQ delivered returns of 43%, with other, more niche-focused tech ETFs pushing even higher.
For those fearing the rally is about to fade, 2024 so far has shown it to be durable. The markets are up, with tech once again driving the gains, and last year’s main theme, AI, is still drawing in investors. The good news is that there are reasons to believe the rally still has room to continue. The U.S. economy looks robust, there’s a high probability that interest rates will come down as the year progresses, and AI adoption seems to be only in its early innings.
As such, with the tech bull market poised to make further inroads, investors should be eyeing the stocks primed for more upside. But of course, not all names in the sector will turn out to be winners; astute stock picking will still be essential here.
This is where the analysts at banking giants such as Morgan Stanley can come in handy. The firm’s tech specialist Keith Weiss, an analyst ranked in the top 1% of Street experts, has been busy sorting out the tech wheat from the chaff. Looking at the potential of two industry giants, Palantir (NYSE:PLTR) and Salesforce (NYSE:CRM), he is favoring one over the other.
So, let’s check which one of these tech stalwarts offers more potential right now. With help from the TipRanks database, we can also find out whether the rest of the Street agrees with the MS view.
Palantir
Tech winners, you say? Palantir, then, readily comes to mind. The big data company has been one of the stock market’s biggest successes over the past year, delivering returns of 220%.
Palantir is a software company specializing in data analysis and integration and gained initial recognition for its work with government agencies, including the CIA and FBI, in intelligence analysis and counterterrorism efforts. The company’s Gotham product is designed for the defense and intelligence sectors, enabling analysts to integrate, visualize, and analyze vast amounts of disparate data from various sources to uncover insights and make informed decisions.
In addition to its work in the government sector, Palantir also serves commercial clients through another platform, Palantir Foundry, which provides a similar data integration and analysis solution tailored for businesses across industries such as finance, healthcare, and manufacturing.
But Palantir’s gains last year were mostly down to the introduction of an additional platform, AIP (Artificial Intelligence Platform), a tool that enables real-time, AI-guided decision-making. Its launch helped the company deliver a set of strong results in the recently released Q4 print.
In the quarter, revenue saw a 19.6% year-over-year increase to reach $608.35 million, beating the Street’s forecast by $5.55 million. While Palantir’s government business has always been the company’s main breadwinner, with AIP taking hold of the narrative, the commercial segment is closing the gap. That side of the business delivered a 32% year-over-year revenue uptick to reach $284 million, with U.S. commercial revenue particularly impressive, growing by 70% y/y to $131 million. At the bottom-line, adj. EPS of $0.08 was in-line with expectations.
However, while investors applauded the results, Morgan Stanley’s Keith Weiss has some bones to pick due to some of the finer details lurking within the report.
“Palantir’s Q4 results illustrated multiple fundamental trendlines within the company, many seeming to pull in different directions – US Commercial customer adds picked up nicely in the quarter and overall billings/ bookings growth was very strong, but absent revenue catch up on two deals (Japanrelated and a federal contract) and upside on strategic investments, revenues likely would have come in light of consensus expectations,” the 5-star analyst explained. “Management noted significant excitement about the ramping demand environment behind their AI Platform (AIP) and a need to rebuild the company around this new opportunity, but total expense growth slowed to ~0% in the back half of 2023… Thus, the risk/reward remains unfavorable.”
Quantifying his stance, Weiss rates Palantir shares as Underweight (i.e., Sell) and he has also lowered his price target from $12 to $9. This represents a substantial 50% decrease from current levels. (To watch Weiss’s track record, click here)
4 other analysts join Weiss in the PLTR bear camp and with the addition of 3 Buys and 5 Holds, the stock claims a Hold consensus rating. Most also think the shares have soared enough for now; at $18.20, the average price target factors in a one-year decline of 25%. (See Palantir stock forecast)
Salesforce
Palantir has certainly been piling on the gains recently, but it still has a way to go to reach the market cap of Salesforce, a stock valued at almost $280 billion.
Salesforce is a cloud-based software-as-a-service (SaaS) company renowned for its customer relationship management (CRM) platform. Founded in 1999, Salesforce has revolutionized the way businesses manage their interactions with customers by offering a comprehensive suite of tools for sales, marketing, customer service, and analytics, all accessible through a user-friendly interface. The Salesforce CRM platform enables organizations of all sizes to streamline their operations, improve customer engagement, and drive growth through a centralized system that provides insights into customer behavior, sales pipelines, and marketing campaigns.
The stock might not have delivered the huge gains PLTR has over the past 12 months, but its 70% returns are certainly not too shabby for a company of its size and were helped along by the company’s third-quarter fiscal 2024 results (October quarter). Revenue hit $8.72 billion, for an 11.2% year-over-year increase, thereby meeting Street expectations. Adj. EPS of $2.11 beat the forecast by $0.05. Looking ahead to FQ4, the company sees adj. EPS hitting the range between $2.25 to $2.26, above the consensus at $2.18.
Moving forward, while Palantir has already made hay out of the AI opportunity, Morgan Stanley’s Weiss thinks it still remains at play for Salesforce, while its valuation versus peers is also appealing.
“With CRM shares trading at a multi-turn discount to large cap Software peers on a growth-adjusted GAAP earnings basis, and investor expectations still muted versus our view of top-line acceleration driven by price increases, an improved bundle-focused sales motion, and growing Data Cloud adoption, we are establishing CRM as our Top Pick in 2024,” Weiss opined.
“CRM shares outperformed large cap Software peers by >20% in 2023; however, share price performance was driven predominantly by a large step higher in Salesforce’s profitability profile, with limited multiple expansion. Heading into 2024, the potential to change investor perception of the company’s durability of top-line growth and positioning for capturing the Generative AI opportunity gives a clear catalyst path to driving CRM’s multiple back in line with peers on a growth-adjusted basis,” Weiss went on to add.
In summary, Weiss rates CRM shares as Overweight (i.e., Buy), with a price target of $350. The implication for investors? Upside potential of 21% from current levels.
Most analysts agree with Weiss here; based on a mix of 27 Buys, 10 Holds and 1 Sell, the stock claims a Moderate Buy consensus rating. However, most seem to think the shares are fully valued; the $285.29 average target implies the stock will stay rangebound for the time being. It will be intriguing to see whether analysts adjust their price targets in the coming months. (See Salesforce stock forecast)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
