Series: "The AI Investor's Desk": Deep dive - Palantir Technologies: The AI Powerhouse Shaping the Future of Data Intelligence #1
A deep dive into Palantir’s business model, cutting-edge AI innovations, and its growing influence in both government and commercial sectors.
“The AI Investor’s Desk” Series:
Format: Biweekly, we present accurate, data-driven equity reports on companies in the AI space, performing thorough financial analysis, delving in their product category and evaluating the potential long term opportunity.
Goal: To provide investors with expert insights and strategies for optimizing AI-focused portfolios and navigating the evolving AI landscape.
Executive Summary
Key Highlights
■ Investment thesis: Palantir Technologies Inc. continues to position itself as a leader in the AI and data analytics space, offering cutting-edge solutions through its platforms, including Foundry, Gotham, and its rapidly expanding Artificial Intelligence Platform (AIP). The company's strong government contracts, coupled with accelerating growth in its U.S. commercial business, underpin its robust financial performance. With continued GAAP profitability, improving free cash flow, and strong customer acquisition, Palantir offers a compelling long-term growth opportunity, particularly in AI-powered enterprise software.
■ Company Overview: Founded in 2003, Palantir specializes in providing big data analytics and AI solutions to both government and commercial clients. The company is known for its two primary platforms:
Gotham: Primarily used by government agencies for intelligence, defence, and law enforcement.
Foundry: Aimed at commercial sectors, including healthcare, energy, and finance, offering data integration and AI-powered decision-making capabilities.
Palantir’s newest addition, AIP (Artificial Intelligence Platform), is poised to be a major growth driver, enabling enterprises to integrate large language models (LLMs) and AI into their operations.
■ Recommendation: Buy (Long-Term):
Palantir's consistent GAAP profitability, expanding commercial footprint, and leadership in AI-driven data analytics position it as a top pick in the AI sector. Despite its high valuation, the company’s strong growth, particularly in U.S. commercial markets and AIP adoption, suggests that Palantir has a long runway for growth. Long-term investors focused on the AI revolution will find Palantir well-positioned to capitalize on increasing enterprise demand for data analytics and AI-powered solutions.
Company Analysis
Q2 Earning Results
■ Summary: Palantir's Q2 FY2024 results showcase strong financial performance driven by significant growth in both its government and commercial sectors. The company reported $678 million in revenue, marking a 27% year-over-year growth. Notably, U.S. commercial revenue surged by 55% YoY, supported by a growing demand for Palantir’s Artificial Intelligence Platform (AIP). Palantir achieved its largest quarterly profit of $134 million, underscoring its successful transition to consistent GAAP profitability. The company’s U.S. government revenue also grew 24% YoY, fueled by large defense contracts, including a $480 million deal with the U.S. Department of Defense. Palantir raised its full-year revenue guidance to $2.74-$2.75 billion and expects to generate up to $1 billion in free cash flow for FY2024. Palantir is poised for continued growth, with AIP adoption accelerating across industries, positioning the company as a leader in enterprise AI.
■ Revenue growth: Palantir posted $678 million in revenue, a 27% year-over-year (YoY) increase and 7% quarter-over-quarter (QoQ). This growth was primarily driven by its U.S. commercial segment and continued strong performance in government contracts. Key Takeaways:
U.S. Commercial Business: Strong growth of 55% YoY demonstrates Palantir’s increasing penetration in the private sector.
Government Contracts: Palantir continues to win sizable contracts, with U.S. government revenue increasing 24% YoY, backed by deals with the U.S. Department of Defense.
■ Profitability and Margins: Palantir continues to exhibit strong profitability metrics, notably achieving GAAP operating income for the sixth consecutive quarter. Palantir's GAAP EPS grew by 500% YoY to $0.06 per share, reflecting improved operational efficiency and margin expansion. The company’s Rule of 40 score (revenue growth + adjusted operating margin) reached 64%, underscoring its growth alongside profitability.
2.1 Key Growth Drivers
■ AIP (Artificial Intelligence Platform): Palantir's AIP, which launched in 2023, is becoming a significant revenue driver, particularly as more organizations adopt AI-powered solutions to improve decision-making. AIP allows companies to integrate large language models (LLMs) into their existing systems, unlocking the potential for transformative AI applications.
AIP Adoption: Over 300 active pilots were launched by the end of Q2 FY2024, and 1,025+ organizations have participated in AIP bootcamps globally.
Revenue Potential: As these pilots convert into long-term contracts, AIP is expected to significantly boost Palantir’s commercial revenue over the next few quarters.
■ Government Contracts: Palantir continues to solidify its position as a critical technology provider to the U.S. government. A major highlight in Q2 FY2024 was the signing of a $480 million contract with the Chief Digital and Artificial Intelligence Office (CDAO) of the U.S. Department of Defense. This contract is focused on scaling AI and ML capabilities across the DoD.
Valuation
■ Current share price: Palantir's current market price of $36 per share and a market capitalization of $80 billion suggest that investors are pricing in substantial future growth, particularly in the company’s expansion in AI and commercial markets. The DCF valuation aligns closely with the current price, suggesting that the market has accurately priced Palantir's long-term cash flow potential. However, the large discrepancies between the book value and EV/EBITDA valuations highlight that Palantir’s valuation is largely forward-looking, driven by its growth narrative rather than current profitability or tangible assets. Investors are betting on Palantir’s ability to capitalize on future opportunities, especially in AI, which implies that the stock is highly sensitive to growth expectations.
■ Multiples: FY 24E EV / EBITDA of 152.6x, and FY 25E EV / EBITDA of 97.8x, are a bit higher than the industry average but not the highest.
■ The DCF model: with a terminal growth rate of 8% estimated an intrinsic value of $35.39 per share, closely align with the current market price. This suggests that the market's pricing is largely consistent with long-term growth expectations based on cash flow projections. This valuation reflects optimistic growth assumptions, particularly in Palantir’s future cash flow generation and expansion into both commercial and government sectors. However, the valuation remains sensitive to any shifts in growth trajectory, margin improvements, and broader macroeconomic conditions, making Palantir a potential long-term growth play in the AI and data analytics space.
■ Key Assumptions for DCF:
a. Revenue Growth Rate: Current Revenue (2024): $2.75 billion (based on updated FY2024 guidance). Revenue Growth Rate:
2024-2026: 18% (reflecting strong growth in both commercial and government sectors)
2027-2030: 12% (gradual deceleration as the company matures)
b. Free Cash Flow (FCF) Margin: Current FCF Margin (2024): ~22%. Expected to rise gradually due to improving profitability:
2024-2026: 24%-26%
2027-2030: 27%-30%
c. Weighted Average Cost of Capital (WACC): 9.5%
d. Terminal Growth Rate: 8.0%
Financial Outlook
■ Overview: Looking ahead, Palantir is well-positioned for sustained growth, driven by the increasing adoption of its Artificial Intelligence Platform (AIP) across both commercial and government sectors. With its raised FY2024 revenue guidance of up to $2.75 billion and an expected $1 billion in free cash flow, Palantir is capitalizing on the growing demand for enterprise AI solutions. The company’s strong foothold in government contracts, particularly in defense, provides a stable revenue base, while the accelerating commercial adoption of AIP opens new growth avenues. As AI continues to transform industries, Palantir’s focus on integrating AI-driven insights within operational systems will likely keep the company at the forefront of the AI revolution.
■ Q3 FY2024 Guidance: For the upcoming quarter, Palantir expects:
Revenue: Between $697 million and $701 million, representing approximately 18% YoY growth.
Adjusted Operating Income: Between $233 million and $237 million, reflecting continued margin expansion.
■ Full-Year FY2024 Guidance
Revenue: Raised to $2.742 billion to $2.750 billion, with strong contributions from U.S. commercial and government segments.
Adjusted Free Cash Flow: Expected between $800 million and $1 billion.
Operating Income: Palantir projects GAAP operating profitability and net income for each quarter in FY2024.
Investment Thesis, Catalysts, and Risks for Palantir Technologies (PLTR)
■ We believe Palantir Technologies is currently fairly valued by the market, but its long-term growth potential in AI-driven data analytics and government contracts could lead to further upside over the next 12-18 months. Several key factors underpin our investment thesis, including:
5.1 Investment Thesis
■ Leadership in AI and Government Contracts: Palantir is uniquely positioned as a leading provider of AI-driven software solutions to both government agencies and commercial enterprises. Its Gotham and Foundry platforms are already deeply embedded within U.S. defense, intelligence, and healthcare sectors. We believe Palantir's ability to continue winning large-scale, long-term government contracts will provide stable, recurring revenue.
Consensus views often understate the impact of Palantir's Artificial Intelligence Platform (AIP), which we believe could become a major driver of commercial revenue growth, especially as enterprises integrate AI into core operations.
■ Commercial Expansion: Palantir’s growth is increasingly coming from its commercial sector, particularly in AI-based enterprise solutions. The Foundry platform has shown strong traction, with U.S. commercial revenue growing by 55% YoY in Q2 FY2024. With increasing demand for AI-powered business decision-making tools, we expect the company’s commercial customer base to expand rapidly in industries like healthcare, finance, and energy.
We estimate that the commercial business will contribute 40-45% of total revenue by FY2026, compared to consensus estimates of around 35%, driven by AIP adoption.
■ Strong Free Cash Flow and Profitability: Palantir's focus on profitability is a key differentiator in the high-growth AI space. With five consecutive quarters of GAAP profitability and strong free cash flow generation, Palantir is in a robust financial position. We expect its free cash flow margin to improve from 22% in FY2024 to 26% by FY2026, allowing the company to reinvest in R&D and expand its AI capabilities.
■ Adoption Tailwinds: As AI adoption accelerates across industries, Palantir is well-positioned to capitalize on the growing demand for large-scale data integration and AI solutions. The AIP platform enables organizations to deploy large language models (LLMs) and AI-driven analytics into their operations, positioning Palantir at the center of the AI revolution.
5.2 Catalysts
FY2024 Growth in AIP Pilots and Commercial Contracts: Palantir is running over 300 AIP pilots with Fortune 500 companies. Successful conversion of these pilots into long-term contracts will be a major revenue driver.
New U.S. Government Contracts: Recent awards, such as the $480 million contract with the U.S. Department of Defense, reinforce Palantir’s leadership in the government sector. More contract wins or renewals will likely boost investor sentiment.
AI Adoption: Increasing enterprise adoption of AI-powered solutions will continue to drive demand for Palantir’s Foundry and AIP platforms, particularly in healthcare, finance, and manufacturing.
International Expansion: Palantir’s growing presence in Europe and Asia will open new revenue streams. International contracts, particularly with European governments, could significantly enhance long-term growth.
5.3 Analyst Recommendations and Target Price Scenarios
Bull Case: $80.00: Based on AIP pilot conversions, continued expansion in both government and commercial sectors, and significant AI-driven contract wins. We estimate Palantir's free cash flow margin will expand to 30% by FY2026.
Base Case: $42.00: Driven by moderate commercial growth (40% YoY in FY2025) and ongoing government contract wins. We estimate free cash flow margins will reach 26% by FY2026.
Bear Case: $28.00: If AIP adoption fails to accelerate as expected and commercial revenue growth slows, Palantir may experience pressure. A lack of new government contracts could limit upside potential.
■ In the current month, PLTR has received 8 Buy Ratings, 8 Hold Ratings, and 10 Sell Ratings. PLTR average Analyst price target in the past 3 months is $27.08
■ Based on 15 Wall Street analysts offering 12 month price targets for Palantir Technologies in the last 3 months. The average price target is $27.08 with a high forecast of $50.00 and a low forecast of $9.00. The average price target represents a -25.42% change from the last price of $36.31.
5.4 Calendar
Q4 FY2024: New commercial contracts and pilot conversions for AIP.
Q1 FY2025: Potential major contract renewal with the U.S. Department of Defense.
1H FY2025: Expansion of AIP pilots into Europe and Asia; potential new government contracts in the U.K. and Germany.
2H FY2025: Full-scale roll-out of AIP across multiple sectors, including healthcare and manufacturing.
5.5 Investment Risks
Slower AIP Adoption or Conversion: While AIP has over 300 pilots, there is no guarantee that these will convert into large-scale contracts. If AIP adoption is slower than anticipated, Palantir’s commercial growth trajectory may face challenges, leading to downside risk for the stock price.
Competitive Pressures: The AI and data analytics space is highly competitive, with companies like Snowflake, Databricks, and Microsoft increasing their AI investments. If competitors outpace Palantir in AI innovation or secure key contracts, Palantir’s market share could be at risk.
Government Spending Cuts: Palantir’s revenue from government contracts is a major driver of its business. Any cuts in defense or intelligence spending, or the failure to renew key contracts, could negatively impact growth. The company's reliance on large government contracts presents concentration risk.
High Valuation Multiples: At current levels, Palantir trades at elevated EV/EBITDA and P/S multiples compared to its peers. If growth expectations are not met, there is significant risk of a valuation contraction, which could lead to a substantial decline in share price.
Regulatory and Geopolitical Risks: Palantir’s deep ties to U.S. government agencies, especially defense, could expose it to geopolitical risks. Changes in government regulation or policies regarding AI and data security could hinder Palantir’s ability to win international contracts.
SWOT Analysis
■ Strengths:
Market Leader in AI-Driven Solutions: Palantir’s strong position in both the public and commercial sectors allows it to benefit from AI adoption across industries.
GAAP Profitability: Consistent profitability for six consecutive quarters demonstrates operational efficiency.
Strong Government Contracts: Palantir’s deep ties to the U.S. government ensure stable revenue streams.
■ Weaknesses:
High Valuation: Palantir’s 14.7x P/S ratio may limit near-term upside, particularly if growth decelerates or macro conditions worsen.
Long Sales Cycles: The company’s complex sales cycles, particularly with government clients, could impact short-term revenue visibility.
■ Opportunities:
AIP Expansion: Palantir's AIP platform is poised to become a major growth driver as more enterprises integrate AI.
International Expansion: Palantir has room to grow internationally, especially in Europe and Asia.
■ Threats:
Intense Competition: The rise of competitors such as Microsoft, Snowflake, and Google Cloud in AI and data analytics presents a threat to Palantir’s market share.
Macroeconomic Uncertainty: Slower enterprise IT spending and global economic pressures could delay contract wins and expansions.
Conclusion
Final Remark
■ Palantir Technologies presents a compelling investment opportunity for long-term growth, particularly in AI-driven enterprise solutions and government contracts. While the stock’s current valuation reflects much of its expected future growth, the company’s unique position in AI and strong free cash flow generation make it a leader in its space. Investors should be aware of execution risks, especially with regard to AIP adoption and increasing competition, but the potential upside from Palantir’s continued success in the AI space remains attractive.
Bibliography
TipRanks – A financial analysis platform providing insights into analyst ratings, price targets, and market research for publicly traded companies. Source used for general analyst consensus and market sentiment regarding Palantir Technologies (PLTR). https://www.tipranks.com
Palantir Investor Relations (PLTR IR) – The official source for Palantir Technologies' financial reports, press releases, earnings calls, and investor updates. Source used for information on Palantir's revenue growth, profitability, AI initiatives, and recent contracts. https://investors.palantir.com
Google Finance – A resource for financial news, stock quotes, and performance metrics. Source used for up-to-date market data on Palantir’s stock performance, including share price, market capitalization, and financial trends. https://www.google.com/finance
Disclaimer:
This report is provided for informational and educational purposes only and does not constitute financial, investment, legal, or any other type of advice. The opinions and analysis contained in this report are based on publicly available information, believed to be accurate at the time of writing, but are subject to change without notice. Any forward-looking statements or estimates are purely speculative and should not be relied upon as guarantees of future performance.
The author and provider of this report do not assume any responsibility or liability for any errors, omissions, or inaccuracies in the content or for any actions taken by individuals or entities based on this report. The analysis and projections should not be considered personalized investment recommendations, nor are they a substitute for professional financial advice.
By using this report, you acknowledge and agree that no fiduciary relationship has been established between the author/provider and the reader, and you assume full responsibility for any financial decisions you make. The reader is strongly encouraged to consult with a certified financial advisor, attorney, tax advisor, or other professionals before making any investment decisions or engaging in financial transactions.
Furthermore, the author/provider will not be liable for:
Any direct, indirect, consequential, or incidental damages (including but not limited to financial loss, lost profits, trading losses) arising from the use of or reliance on this report.
Any claims arising from third-party data inaccuracies, market changes, or regulatory shifts that may affect the validity of the content presented.
Any legal claims, disputes, or other actions brought against the author/provider in connection with this report, including those related to securities laws, defamation, misrepresentation, or negligence, to the fullest extent permitted by law.
This report is not an offer or solicitation to buy or sell any securities or financial instruments, and past performance is not indicative of future results. Always seek professional legal and financial counsel before engaging in investments or other financial decisions.
Prepared by AI Monaco Financial Analysts
AI Monaco is a leading-edge financial analysis and research firm that specializes in utilizing AI-powered analytics and data-driven insights to provide clients with exceptional market intelligence. We focus on offering deep dives into key sectors like AI technologies, data analytics, and innovative tech industries, helping our clients stay ahead of market trends and make well-informed investment decisions. Our analysts combine decades of industry experience with cutting-edge AI tools to produce forward-thinking financial strategies that are tailored to your needs.
Due to Substack’s space limitations, this is just a summary. For the full equity report on Palantir Technologies, including detailed financial analysis and future growth projections, head over to my X/Twitter channel: @monacoaifund for the complete breakdown!