After Earnings, Is Palantir Stock a Buy, a Sell, or Fairly Valued?

Palantir Technologies released its third-quarter earnings report on Nov. 4. Here’s Morningstar’s take on Palantir’s earnings and stock.

Key Morningstar Metrics for Palantir Technologies

• Fair Value Estimate: $21.00
• Morningstar Rating: 1 star
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High

What We Thought of Palantir Technologies’ Q3 Earnings

• The company reported robust results, with the top line growing 30% year over year to $726 million and operating margins expanding to 15.6% from 7.2% a year ago. US commercial customers drove the firm’s top line, with sales from the segment growing 54% year over year.
• Palantir remains one of the clearest beneficiaries of an uptick in demand for AI solutions. Its Artificial Intelligence Platform continued to fire on all cylinders, thanks to demand from both commercial and government clients. We see a long growth runway in the government sector, owing to the massive demand for AI-first solutions across functions like the military and healthcare.
• With another better-than-expected quarter in the books, we’ve raised our fair value estimate for Palantir to $21 per share from $19. While we view the stock as overvalued, we remain optimistic about the firm’s growth and margin expansion opportunities in the coming years. Palantir is by far the most expensive software company under our coverage, with an enterprise value 31 times our 2025 sales estimate. We view the long-term growth implied in its current valuation as unrealistic. With the firm’s shares priced for perfection, we remind investors that any bump in the road—such as sales execution challenges or weaker-than-expected top-line growth or guidance—could materially affect the stock’s valuation.

Fair Value Estimate for Palantir

With its 1-star rating, we believe Palantir’s stock is significantly overvalued compared with our long-term fair value estimate of $21 per share, which implies a 2024 enterprise value/sales multiple of 15 times.. We forecast Palantir’s revenue to grow at a 23% compound annual growth rate over the next five years as the firm expands both governmental and commercial operations.

We expect the majority of this top-line growth to be driven by commercial clients as the firm seeks to broaden its commercial client base. While government clients can be sticky, large governmental contracts create lumpiness in revenue. As a result, Palantir’s shift to more commercial clients should create a more ratable revenue mix. We also expect the firm to continue expanding sales within its existing client base. We view Palantir’s strong net retention rate as an indicator of this.

Read more about Palantir’s fair value estimate.

Economic Moat Rating

We assign Palantir a narrow moat, owing primarily to strong switching costs associated with its platforms and secondarily to intangible assets in the form of strong customer relationships the firm has built over the years.

We think Palantir’s two main platforms, Gotham and Foundry, both benefit from high customer switching costs, as evidenced by its gross and net retention metrics. Palantir has exhibited strong customer growth while diversifying its business away from lumpy governmental contracts toward commercial clients. As a result, although we forecast a couple of more years of hefty operating losses, we expect the firm to generate excess returns over invested capital over the next decade.

Read more about Palantir’s economic moat.

Financial Strength

We view Palantir’s financial position as healthy. The company ended fiscal 2023 with around $3.7 billion in cash and liquid investments and no debt. While Palantir only posted GAAP profitability in 2023, we expect the firm to continue this trend while generating strong cash flow margins as it increases its operating leverage by toning down some of its research and sales expenditures.

Read more about Palantir’s financial strength.

Risk and Uncertainty

We assign Palantir a Very High Uncertainty Rating due to some key risks that we view as potentially impeding its growth trajectory. While the firm has landed high-value commercial and government clients over the years, we have found the executive team’s execution to be questionable at best. The firm’s sales strategy has led to relatively poor customer acquisition, despite it being in the commercial space for many years, Palantir’s commercial customer count is only slightly more than 200. While the firm has pivoted to a module-based sales model that should bolster commercial customer additions, the execution of this strategy remains to be seen.

Read more about Palantir’s risk and uncertainty.

PLTR Bulls Say

• Palantir has strong secular tailwinds, as the AI/ML market is expected to grow rapidly due to the exponential increase in data harvested by organizations.
• With products targeting both commercial and governmental clients, Palantir has a distributed top line, with noncyclical governmental revenue insulating the overall top line during lean times.
• Palantir’s focus on modular sales could lead to substantially more commercial clients, which it could subsequently upsell.

PLTR Bears Say

• By not selling to countries or companies that are antithetical to its mission and cultural values, Palantir has self-restricted its growth opportunities.
• Palantir’s AI platform is off to a good start, but we anticipate robust competition in the years ahead.
• Palantir’s executive team has made questionable strategic decisions in the past. While past performance doesn’t necessarily indicate future results, the missteps could merit caution.

This article was compiled by Sokhoeun Noeut.