AI Platform Adoption Cycles Will Eventually Normalize And Pressure Long-Term Earnings Momentum

Catalysts

About Palantir Technologies

Palantir Technologies develops data integration and artificial intelligence software platforms for government and commercial enterprises worldwide.

What are the underlying business or industry changes driving this perspective?

• AI platform adoption cycles in large enterprises may normalize as pilots mature into narrower, budget constrained deployments, which may limit the ability of AIP boot camps and C suite enthusiasm to sustain current hyper growth revenue trajectories.
• Heavy reliance on U.S. commercial and U.S. government customers at a time of rising geopolitical risk and potential defense budget reprioritization could compress deal sizes and elongate renewals, pressuring TCV growth and net dollar retention.
• The rapid proliferation of competing AI stacks from hyperscalers and incumbent software vendors that bundle AI capabilities into existing contracts may erode Palantir’s pricing power and mix, weighing on both revenue growth and adjusted operating margins.
• Ongoing dependence on elite technical talent and intensive field deployment engineering to deliver outcomes at scale risks driving structurally higher expense growth as the customer base widens, which could cap future operating margin expansion and free cash flow leverage.
• Regulatory and political scrutiny around data usage, defense applications and contentious government programs could constrain the scope of deployments in key regions over time, limiting international diversification and dampening long term earnings growth.

Assumptions

This narrative explores a more pessimistic perspective on Palantir Technologies compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Palantir Technologies's revenue will grow by 37.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 28.1% today to 27.5% in 3 years time.
• The bearish analysts expect earnings to reach $2.8 billion (and earnings per share of $1.01) by about December 2028, up from $1.1 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $5.1 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 100.6x on those 2028 earnings, down from 420.8x today. This future PE is greater than the current PE for the US Software industry at 32.4x.
• The bearish analysts expect the number of shares outstanding to grow by 1.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.42%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Sustained triple digit growth in U.S. commercial revenue, which is already growing 121% year over year and driving a 53% full year 2025 revenue growth outlook, suggests Palantir may be in the early stages of a long runway of AI adoption that could continue compounding revenue and total contract value rather than contracting.
• The company’s expanding product moat around AIP, ontology and AI agents such as AI FDE and AI Hivemind, which dramatically compress deployment times and make both Palantir’s own teams and customer developers more productive, could structurally support very high adjusted gross margins of 84% and adjusted operating margins of 51% over the long term, which would limit the downside to net margins.
• Deepening entrenchment in U.S. and allied government missions, including being named the U.S. Army’s central data platform and supporting multiple active geopolitical theaters, indicates durable, mission critical demand that can underpin growing remaining deal value of $8.6 billion and bolster long term earnings resilience.
• The combination of a Rule of 40 score of 114% and $2 billion of trailing 12 month adjusted free cash flow, together with disciplined headcount growth of roughly 10% against 63% revenue growth, points to powerful operating leverage that could keep earnings and free cash flow expanding even if topline growth moderates.
• Broader secular trends in enterprise AI and reindustrialization, evidenced by rapid expansions from large industrial, insurance and manufacturing customers and programs like the American Tech Fellowship, may continue to drive wider AIP deployments across new verticals and geographies, which could support multi year growth in revenue, net dollar retention and long term earnings power.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Palantir Technologies is $87.03, which represents up to two standard deviations below the consensus price target of $184.65. This valuation is based on what can be assumed as the expectations of Palantir Technologies's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $255.0, and the most bearish reporting a price target of just $50.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $10.0 billion, earnings will come to $2.8 billion, and it would be trading on a PE ratio of 100.6x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $193.38, the analyst price target of $87.03 is 122.2% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.