Enterprise AI Adoption Will Drive Sustained Gains Through Expanding Commercial Demand

Catalysts

About Palantir Technologies

Palantir Technologies is an enterprise software company specializing in data integration, artificial intelligence, and analytics platforms designed to deliver transformational impact for commercial and government clients.

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

• Rapid enterprise adoption of AI solutions is fueling sustained growth in Palantir’s commercial customer base, which supports continued expansion in revenue and customer count.
• Increasing recognition by executive leadership teams that broad, organization-wide deployment of AI platforms like AIP is a competitive necessity is accelerating the size and value of new deals. This positively impacts total contract value and revenue visibility.
• Ongoing investment in proprietary AI and ontology technology has established a defensible competitive moat. This drives high gross margins and operating leverage, thereby improving net margins as the business scales.
• Strategic consolidation of U.S. military and government contracts, such as the Army’s directive to centralize on Palantir platforms, increases recurring, high-value contracts and enhances long-term earnings stability.
• Expansion of field-deployable and edge AI solutions is positioning Palantir to capitalize on the growing demand for embedded, real-time AI in diverse industries. This is expected to generate additional revenue streams and support margin expansion.
• Structural reindustrialization trends in the U.S. and growing international appetite for advanced, production-grade AI solutions set the stage for outsized top-line growth and higher overall profitability in coming years.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Palantir Technologies's revenue will grow by 40.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 28.1% today to 33.2% in 3 years time.
• Analysts expect earnings to reach $3.6 billion (and earnings per share of $1.57) by about December 2028, up from $1.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $4.9 billion in earnings, and the most bearish expecting $2.2 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 164.5x on those 2028 earnings, down from 364.4x today. This future PE is greater than the current PE for the US Software industry at 32.0x.
• 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 8.41%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The majority of Palantir’s exceptional revenue growth is concentrated in the U.S. market. International markets such as Europe are stagnating. Prolonged underperformance outside the U.S. could dampen company-wide revenue expansion and limit global customer diversification.
• A significant portion of Palantir’s business comes from large-scale government and defense contracts in the U.S., which can be volatile due to shifting political climates, changing defense priorities, or contract renewals. This poses risks to long-term earnings stability and revenue visibility.
• The company’s intense focus on specialized, high-value enterprise AI platforms relies on strong demand from commercial and government customers. If rapid AI adoption slows, competitors close the technology gap, or customers develop in-house solutions, Palantir could see reduced sales, lower profit margins, and slower earnings growth.
• Continued operating leverage and expanding margins are dependent on maintaining high gross margins and controlling expenses. A need for higher spending on technical talent, customer support, or product development as the company scales could pressure net margins and profitability.
• Palantir’s brand and contract renewals may be impacted by geopolitical controversies or its involvement in sensitive projects. This could result in customer losses, reputational damage, or barriers to international expansion, thereby affecting revenue and long-term growth.

Valuation

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

• The analysts have a consensus price target of $185.76 for Palantir Technologies based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• 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 analysts, you'd need to believe that by 2028, revenues will be $10.8 billion, earnings will come to $3.6 billion, and it would be trading on a PE ratio of 164.5x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $167.49, the analyst price target of $185.76 is 9.8% 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.