AI Adoption And Defense Modernization Will Drive Powerful Long Term Tailwinds

Catalysts

About Palantir Technologies

Palantir Technologies builds mission critical data and AI platforms that turn complex data into operational decisions for governments and enterprises.

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

• Explosive adoption of AIP across U.S. commercial customers, evidenced by 121% revenue growth and record TCV, signals that AI is becoming a board level mandate and positions Palantir to compound subscription and expansion revenue for years as customers standardize on a single enterprise AI platform, lifting top line growth.
• Deeply entrenched U.S. government relationships, including the Army wide consolidation on Vantage and expanding work across multiple theaters of conflict, create long duration, mission critical programs that are difficult to displace and are likely to drive durable revenue visibility and stable, high margin earnings.
• Palantir’s ontology centric architecture and AI agents such as AI FDE and AI Hivemind dramatically compress deployment timelines and reduce reliance on traditional systems integrators, which structurally improves implementation efficiency and supports sustained expansion in operating margins and free cash flow.
• Reindustrialization, defense modernization and the need for resilient supply chains are pushing manufacturers, utilities and defense primes to operationalize AI at scale. This is a market segment where Palantir already has production deployments and it may translate into larger enterprise wide deals and rising net dollar retention.
• The ability to empower domain experts and frontline workers rather than just centralized IT teams broadens the addressable user base inside each customer. This increases seat penetration, drives higher average revenue per customer and may support ongoing double digit earnings growth even with modest headcount additions.

Assumptions

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

• The bullish analysts are assuming Palantir Technologies's revenue will grow by 44.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 28.1% today to 41.4% in 3 years time.
• The bullish analysts expect earnings to reach $4.9 billion (and earnings per share of $2.29) by about December 2028, up from $1.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $2.2 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 165.7x on those 2028 earnings, down from 383.1x today. This future PE is greater than the current PE for the US Software industry at 31.7x.
• The bullish 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 8.43%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Palantir’s extraordinary growth rates in U.S. commercial and government markets, including triple digit U.S. commercial expansion and a Rule of 40 score far above 100%, may prove unsustainably elevated as AI adoption matures and competition intensifies. This could slow top line revenue growth and reduce the likelihood of achieving bullish earnings targets over the long term, negatively impacting earnings.
• The company’s heavy strategic and cultural alignment with U.S. defense, intelligence and controversial agencies such as ICE, alongside a self described anti woke posture, may trigger political, regulatory or reputational pushback over time. This could constrain contract awards, limit international adoption and pressure both revenue and net margins through higher compliance and lobbying costs.
• Management is explicitly prioritizing ongoing heavy investment in AI products, technical talent and programs like the American Tech Fellowship even as it celebrates record profitability. If these long term bets fail to deliver proportional customer expansion or pricing power, they could erode operating leverage and compress net margins and free cash flow growth.
• Palantir’s ontology centric architecture and AI agents such as AI FDE and AI Hivemind are positioned as uniquely indispensable. However, if enterprises increasingly adopt open source tooling, competing AI platforms or in house solutions to avoid vendor lock in, the perceived moat could narrow and slow renewals and expansions, pressuring subscription revenue and long run earnings growth.
• The business is increasingly concentrated in the U.S., with Europe described as stagnant and international commercial growth far lagging domestic performance. Any cyclical slowdown in U.S. IT and defense spending or policy shifts on budget priorities could materially weaken deal flow, reduce remaining deal value and weigh on both revenue and earnings over time.

Valuation

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

• The assumed bullish price target for Palantir Technologies is $255.0, which represents up to two standard deviations above the consensus price target of $185.76. 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 bullish 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 bullish analyst cohort, you'd need to believe that by 2028, revenues will be $11.9 billion, earnings will come to $4.9 billion, and it would be trading on a PE ratio of 165.7x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $176.08, the analyst price target of $255.0 is 30.9% higher.
  
• 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.