To The Moon

An early 2023 rally for Palantir Technologies has petered out, and now it's up to the bulls and bears to hash it out over PLTR$Palantir Technologies Inc.(PLTR)$ stock.

Views from either side of the investment aisle are largely tied to views on the renewal of big U.S. government contracts. Also at play is its business in Japan, declining revenue from investments in special-purpose acquisition companies and traction in the health care industry.

PLTR stock popped on its fourth-quarter earnings report. But bearish views focus on whether the maker of data analytics software can meet 2023 guidance.

Palantir is one of manyAI stocks to watch. Shares are still up 24% this year, rebounding from a nearly 65% fall in 2022.

Yet PLTR stock has retreated from an intraday high of 10.31 set on Feb. 16.

PLTR Stock: Japan Business

Deutsche Bank analyst Brad Zelnick is among PLTR stock bears.

"We believe the company's 2023 revenue outlook for +16% growth at the guidance midpoint may prove optimistic and is certainly not without risk given macro factors, the drag from SPAC (special purpose acquisition companies) investments and possible further delays in funding for outstanding U.S. government projects," Zelnick said in recent note to clients.

Meanwhile, Bank of America analyst Mariana Perez Mora maintains a buy rating on Palantir stock.

"We think that higher-than-peers' stock-based compensation, outsized founders' voting power, and a less conventional investment and sales strategy are balanced by a beneficial position to national security and U.S. government/allies' modernization efforts, a leading role in artificial intelligence-powered platforms and opportunistic partnerships," Mora said in her note to clients.

For Wall Street analysts, one new factor in pondering the valuation of Palantir stock involves its business in Japan. The company in November acquired full ownership of a joint venture in Japan to sell Palantir software.

During the fourth quarter, Palantir turned profitable using generally accepted accounting principles, or GAAP. A one-time $44 million gain from the Japan joint venture acquisition boosted profits.

Palantir SPAC Revenue Falling

In 2023, Palantir will consolidate revenue from the joint venture in its earnings reports. A Morgan Stanley report estimates the venture has an annual revenue run-rate of $50 million heading into 2023.

Japanese insurance firm Sompo Holdings is the biggest customer.

But bears on PLTR stock note that revenue from special-purpose acquisition companies will continue falling in 2023. SPACs raise money in an initial public offering with the purpose of making acquisitions.

SPACs that got Palantir investments agreed to sign multiyear contracts to use the company's software in their core operations. But many of them are struggling to stay afloat.

Palantir gets nearly 60% of revenue from government agencies that use Palantir software for intelligence gathering, counterterrorism and military purposes.

PLTR Stock: Health Care A Bright Spot

Further, PLTR stock aims to grow its commercial business. The software maker is looking to expand into the health care, energy, automotive and manufacturing sectors.

"Palantir now works with four large organizations that represent nearly 10% of the entire U.S. hospital system, including Cleveland Clinic and Tampa General," Goldman Sachs analyst Gabriela Borges noted in a recent report.

In the fourth quarter, commercial revenue rose 11% to $216 million, slowing from 47% growth in the year-earlier quarter. In the year-earlier quarter, revenue rose 27% excluding SPACs.

The bigger government business remains key.

One wild card is whether Palantir will win more contracts in the United Kingdom from its National Health System. The NHS used Palantir during the coronavirus emergency. But a bigger contract worth 400 million euros, or roughly $426.6 million, is now up for grabs.

Palantir U.S. Government Renewals

Meanwhile, the use of Palantir data analytics software is under scrutiny in Germany because of privacy concerns.

One problem for PLTR stock is that large U.S. government contracts are coming up for renewal, William Blair analyst Louie DiPalma said in a note. He said some U.S. government agencies aim to have multiple software providers rather than rely solely on Palantir.

"Palantir has an abnormally high number of significant government contracts (six) up for renewal over the next 15 months, including three of its four largest programs," said DiPalma.

He added: "In our view, Palantir faces legitimate competition from open-sourced solutions. Some agencies seem to view Palantir's software as a stopgap solution until a suitable open-sourced data analytics system is ready."