Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
Palantir PLTR shares are down 9% in after-hours trading 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.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
