Palantir will surge 31% as Wall Street realizes potential for breakneck profit growth, Morgan Stanley says

• Investors aren't seeing the bigger picture regarding Palantir's discounted valuation, Morgan Stanley analysts said Monday.
• The bank initiated an "overweight" rating on Palantir's shares in a note to clients. The analysts' $13-per-share price target implies a 31% rally from Monday's close over the next 12 months.
• Palantir closed Monday just below its $10 offering price and has largely failed to break above the threshold since its September trading debut.
• The discounted valuation "underappreciates" Palantir's momentum, government opportunity, and a strong shift to software sales, the team led by Keith Weiss said.
• Watch Palantir trade live here.

Morgan Stanley analysts initiated coverage of Palantir shares with an "overweight" rating on Monday, saying the firm is undervalued as investors fail to realize its full potential.

The data-mining firm's shares haven't met investors' lofty hopes in their first month of trading. The stock closed at $9.95 on Monday, below the $10 level Palantir began trading at.

The underwhelming performance could be a result of unfair discounting, Morgan Stanley said in a note to clients. Palantir gives less information on its deals than its competitors do, hindering analysts' ability to gauge its valuation. Investors also debate whether the firm has outgrown its consulting origins and can be valued as a true software company. Palantir's addressable market is heavily skewed toward large agencies and companies, which some could view as a limitation.

Read more: 'I'm basically going to be long growth': Billionaire investor Chamath Palihapitiya has hauled in a 997% return since 2011. He details the 5 sectors shaping his long-term investment playbook.

But the stock's low level "underappreciates" Palantir's momentum, government opportunity, customer acquisition, and "rapid margin expansion," the team led by Keith Weiss said. The analysts also set a $13 price target for Palantir shares, implying a 31% rally over the next 12 months from Monday's close.

---

The rosy note helped lift Palantir 4.9% in Monday trading despite the broader market slide.

For now, Palantir is plagued by limited opportunity, according to Morgan Stanley. Its projects are largely limited to government contracts and commercial enterprises, leaving it with little room to expand. But the introduction of its Apollo delivery platform should cut the costs of deploying customer-facing platforms and, in turn, shift the company's business toward software sales from services, the analysts said. Read more: BANK OF AMERICA: Buy these 11 underowned stocks ahead of their earnings reports because they're the most likely candidates to beat expectations in the weeks ahead

With Palantir becoming the "de facto" data solution for many federal agencies, the company can use an incoming wave of government-sourced revenue to compete better with its commercial side, they added.

"We see the level of discount to peers implied by current trading as too severe, creating an attractive risk/reward," the team wrote.

Palantir has two "buy" ratings, two "hold" ratings, and no "sell" ratings from analysts. Wall Street's median price target for its shares is $11.75.

Now read more markets coverage from Markets Insider and Business Insider:

'EVs are REALLY profitable': Morgan Stanley analyst Adam Jonas and 3 more experts lay out their bullish cases for Tesla and 3 other popular electric-car stocks

Earnings season is repeating a tech-bubble trend filled with counterintuitive market reactions, Bank of America says A capital-gains tax hike would only temporarily slow the stock market's rally, Goldman Sachs says

78895490