This is Goldman’s “single biggest question” on Palantir

Palantir was on track for its fourth consecutive decline on Friday, perhaps driven by news of software-related cost cutting at the Department of Defense, a key client of the defense, data analytics, and AI integration software firm.

The drop comes as Goldman Sachs stock analysts issued an interesting note on the retail fave — and last year’s best-performing member of the S&P 500 — Thursday evening, summing up their takeaways from a March 11 visit to the company’s New York office.

From a core business perspective, they had questions about the durability of Palantir’s advantage in providing enterprise AI software that helps corporate customers integrate artificial intelligence into their workflows. AI has been a key driver of the company’s recent growth.

Goldman analysts wrote (emphasis added):

“From a fundamental standpoint, we believe the single biggest question is Palantir’s ability to maintain ‘win rates’ as the AI software [total addressable market] expands.

We think we may be at a local maximum on the challenges of building enterprise AI software: SaaS [software-as-a-service] incumbents lack comprehensive AI functionality, AI native start ups typically only address a fraction of the broader enterprise problem, and many developers and IT professionals are still early in their learning curves of how to make AI projects successful.

At the same time, organizations are having to face decades of sub-optimal data management practices, and compounding security and governance challenges associated with building software on poorly organized data. Palantir addresses all of these challenges today — but each of these challenges should get easier to manage over time.

SaaS incumbents will build in more AI functionality, AI native start ups will broaden in scope (or be acquired by SaaS incumbents), developers will get smarter, data strategy will be cleaned up and security and governance will improve in concert.

In other words, while we don’t question the size of the opportunity, we do think that the ecosystem is rapidly evolving, and that visibility is low.”

The analysts, who have a “neutral” rating on the stock and a 12-month price target of $80 a share, also cited the typical concerns about Palantir’s ostensibly ridiculous valuation as one reason they can’t be bullish on the shares. (Forward price to earnings is 151x, forward price to sales is 51x, and trailing price to earnings is 460x.)

They also noted that the large chunk of shares in retail traders’ hands “leads to stock moves that are sometimes independent of fundamentals and outsized volatility.”