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Palantir Technologies PLTR released its first-quarter earnings report on May 5. Here’s Morningstar’s take on Palantir’s earnings and stock.
Palantir Technologies shares were down 9% in after-hours trading on May 5 despite the firm beating both management‘s guidance and FactSet analyst expectations on revenue by 3%. Contribution margins (an efficiency metric) reached an all-time high of 61%. Revenue growth was 39% and adjusted operating margin was 44%.
Why it matters: Palantir continues to impressively penetrate the US government and commercial segments. That said, we believe we have reached a point where respectable earnings beats and raised guidance aren’t enough to materially move the stock to the upside.
Palantir trades at 73 times revenue, nearly a 400% premium over other artificial intelligence software companies. We believe the premium multiple creates high expectations where management‘s 4% guidance raise on 2025 revenue appears underwhelming.We believe Palantir justifies high expectations due in part to US commercial customers increasing 65% year over year. Not only are the customer counts increasing, but the size of deals is also increasing, as exhibited by a doubling of agreements worth more than $1 million.
The bottom line: We maintain our narrow moat rating and raise our fair value estimate by 11% to $100 per share, thanks to increasing demand from government and commercial customers for Palantir’s optimization software.
We believe that the Department of Government Efficiency, the Golden Dome US missile defense system, and a potential $1 trillion-plus national security budget serve as tailwinds for Palantir’s growth in the coming years.Palantir is trading in 3-star territory, which indicates fair risk-adjusted return potential. If we see the stock move back into the $80 level, we believe upside potential would favor adding shares.
Between the lines: Palantir is blowing past the traditional Rule of 40 for software firms. This rule holds that a sum of revenue growth and operating margin above 40 is particularly strong. Palantir’s score of 83 shows an exemplary balance between market capture and efficiency.
Palantir Technologies Stock Price
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Fair Value Estimate for Palantir Technologies
With its 3-star rating, we believe Palantir stock is fairly valued compared with our long-term fair value estimate of $100 per share, which implies a 2025 enterprise value/sales multiple of 57 times.
In our opinion, the primary driver of the stock’s value is the total addressable market Palantir’s software can ultimately serve. The size of its total addressable market is truly a trillion-dollar question that is unfortunately laden with assumptions. Our base case has Palantir’s TAM growing to $1.4 trillion by 2033. From today, we assume growth is non-linear, with a slight inflection higher from 2028-30 to rates nearing 35% per year.
Our analysis concludes that we are in the early innings of an AI revolution. In our base case, we expect Palantir to have a growth profile similar to that of innovative software companies like Salesforce in the late 2010s. Salesforce was able to drive efficiency by creating a standardized workflow and logging process for enterprises that were accustomed to bloated sales teams compiling data in disparate locations. We expect Palantir to similarly drive efficiency amongst enterprises that now lean on large information technology teams that interpret and present data to assist in decision-making.
Read more about Palantir Technologies’ fair value estimate.
Economic Moat Rating
We believe that Palantir warrants a narrow moat rating, based on switching costs and intangible assets. Companies like AWS, Snowflake, and ServiceNow have developed data analytics tools, but Palantir differentiates itself as the only AI company with a framework that organizes disparate datasets and facilitates optimized decision-making.
Palantir engineers a read-write feedback loop that enables connectivity throughout a business, creating an accessible analytical framework to drive nuanced decision-making that improves over time. Palantir often competes against internal information technology departments because it also analyzes data and creates information dashboards for interpretation. This traditional in-house IT and data aggregation framework often results in patchwork solutions that are cumbersome, difficult to improve, and costly to scale.
Read more about Palantir Technologies’ economic moat.
Financial Strength
We view Palantir’s financial position as healthy and improving. As of March, Palantir had nearly $1 billion in cash and $4.4 billion in marketable securities (mostly US Treasury securities) and no debt. Its liquidity position improved by $1.5 billion in 2024.
Palantir now has two full years of GAAP profitability under its belt, with 2024 over twice as profitable as 2023, and we expect rapid growth and profitability to continue. In the past, Palantir has had dilution concerns revolving around high stock-based compensation, which puts a non-cash drag on profitability. We saw a significant one-time stock-based compensation expense of $120 million in the fourth quarter of 2024 triggered by the stock price exceeding $50 per share, but we do not expect this to be a trend.
Read more about Palantir Technologies’ financial strength.
Risk and Uncertainty
We assign Palantir a Very High Uncertainty Rating. The company’s biggest uncertainty is the broad potential size of the TAM its software can serve, and the level of customer penetration it can achieve. The firm’s versatility creates significant upside potential. Unfortunately, because the TAM estimate is so uncertain and is one of the largest drivers of the stock’s valuation, downward share price corrections can be severe and painful when there is an unfavorable change in investors’ perception of future market size.
Read more about Palantir Technologies’ risk and uncertainty.
PLTR Bulls Say
Palantir has developed the premier AI software, primed to take advantage of the trend toward digitization and automation. AI software maintains a strategic position on the AI-value chain.Palantir’s ontology framework and AI orchestration allow for the democratization of machine learning. Its software is useful to employees at all levels of a business to drive efficiency enhancements.The new boot-camp-style sales effort has allowed Palantir to achieve rapid growth in the US commercial segment. The US commercial business has a large total addressable market.
PLTR Bears Say
Palantir’s end markets are confined to entities that coalesce with Western ethos. This caps the total addressable market.The decreasing cost of AI inference and the convergence of LLMs will result in lower barriers to entry in the AI decision-making software industry that Palantir currently dominates.Palantir’s dual-class share structure opens the door for overzealous noncore investment opportunities without common shareholders’ checks and balances
This article was compiled by Gautami Thombare.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.