Key Morningstar Metrics for Palantir Technologies
• Fair Value Estimate: £17.07 ($21.00)
• Morningstar Rating: 1 star
• Economic Moat: Narrow
• Morningstar Uncertainty Rating: Very High
Palantir Technologies PLTR stock skyrocketed in 2024, fueled by the company’s strong position as an artificial intelligence play. However, its huge gains in such a short period raise the question of whether investors are making a risky bet buying the stock now.
Palantir started 2024 trading near $15 per share, jumped in early February, then moved mostly sideways for roughly six months. Then the story changed dramatically, as the stock crossed $30 per share in August for the first time since 2021, continued pushing higher, and in November began a surge that took it to a string of all-time highs. Palantir topped $82 per share just before Christmas, then recently fell back to $70.
The catalyst for the massive rally was Palantir’s AI strength. “The firm’s management has done a terrific job convincing investors that Palantir is an AI pureplay set for massive, transformational growth in the coming years as investments in AI continue to trend upward,” explains Morningstar equity analyst Malik Ahmed Khan.
However, Khan cautions investors: “We don’t see the growth/profitability assumptions baked into Palantir’s valuation as reasonable. We believe the stock is trading completely disjointed from its fundamentals. A single ‘bad’ quarter—aka one that misses investors’ inflated expectations—could potentially crater the stock price.” He notes how in 2022, Palantir stock lost more than half its value after the firm missed elevated earnings expectations and provided disappointing outlooks.
Palantir Stock Price
Source: Morningstar Direct.
Palantir’s Growth Outlook
For now, Palantir’s growth is spurring investor enthusiasm for the stock. Khan says the firm’s sales and profitability have reaccelerated in recent quarters, showcasing the strong demand and cost-efficiency of its solutions. He notes that revenue growth surged from the mid-teens in mid-2023 to 30% year over year in the third quarter, with 30% year-over-year growth expected in the fourth.
“This significant increase in revenue is primarily due to the rapid expansion of US commercial sales as US enterprises continue to deploy AI for a myriad of reasons, ranging from improving business efficiencies to unlocking more growth opportunities within their businesses,” Khan says. “Profitability, like sales, has trended up quite nicely, with the firm’s GAAP operating margins expanding to the mid-teens in 2024, up from mid-single digits in 2023.”
“We have a very bullish outlook on Palantir’s growth prospects,” Khan says. The base case is that revenue will grow at a 19% annual rate over the next decade, with operating margins north of 40% a decade from now. The bull case calls for a 24% annualized revenue growth rate over the next 10 years, with a 45% operating margin at the end of that time.
Underlying this growth is Palantir’s strength in AI at a time when the stock market is rewarding AI names. “The firm’s ability to leverage Big Data to drive business outcomes is indisputable,” Khan says.
How to View Palantir’s Valuation
Despite these strong fundamentals, Palantir’s stock is trading at an extremely lofty valuation compared with Morningstar’s fair value estimate. Khan pegs the stock’s fair value at $21, making for an extremely high price/fair value estimate ratio of 3.6.
“When you look at the firm’s valuation and the growth expectations baked into this valuation, it quickly becomes apparent that the market is expecting sales to keep accelerating and maintain the elevated growth rate for the foreseeable future,” he says. To justify $80 per share, investors would be betting on 30% 10-year annual sales growth and operating margins over 60%. At these prices, “investors should steer clear of this stock,” Khan says.
Palantir Stock vs. Morningstar Fair Value Estimate
Source: Morningstar Direct.
The following are highlights of Khan’s current outlook for Palantir and its stock. The full report and more of his coverage are available here.
Fair Value and Profit Drivers
Our fair value estimate of $21 per share implies a 2024 enterprise value/sales multiple of 15 times. We forecast Palantir’s revenue growing 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.
Economic Moat
We assign Palantir a narrow economic moat rating 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 up over the years. We think that Palantir’s two main platforms, Gotham and Foundry, both benefit from high customer switching costs as evidenced by the firm’s strong 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, we expect the firm to generate excess returns over invested capital, on the whole, over the next decade.
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.
Looking back at the company’s execution, we see a mixed history. While we applaud the firm’s execution on the US commercial front in recent years, we remain cautious of the firm’s claims of future growth for its solutions. Our lack of confidence in the executive team is highlighted by the special-purpose acquisition company investment program that led to more than $300 million of losses for Palantir as investments in early-stage companies went south when the markets recalibrated in 2022. These investments, based on a quid pro quo of the investees becoming Palantir customers, were a bit reckless, in our view.
Palantir Bulls Say
- Palantir has strong secular tailwinds as the AI market is expected to grow rapidly due to the exponential increase in data harvested by organizations.
- With products targeting commercial and governmental clients, Palantir has a diversified top line, with noncyclical governmental revenue insulating the overall top line during lean times.
- Palantir’s focus on delivering business value to its customers via AIP has seen tremendous commercial interest, a trend we expect to see continue.
Palantir Bears Say
• By not selling to countries or companies antithetical to its mission and cultural values, Palantir has self-restricted its growth opportunities.
• Palantir’s AI Platform has seen solid customer interest, but we anticipate more competition in the AI field further down the road as more companies begin offering AI solutions.
• 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.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
