Enterprise AI And Critical Government Contracts Fuel Optimistic Revenue And Profit Forecasts

Key Takeaways

• Palantir's success in U.S. commercial and government sectors, highlighted by strategic contracts and AI market opportunities, posits a strong future earnings growth.
  
• Expansion with current customers and a focus on American reindustrialization signify potential for increased revenue and market penetration.
  
• Palantir's success faces risks from reliance on U.S. government contracts, intense competition, operational challenges in scaling, geopolitical risks, and execution risks in strategic shifts.

Catalysts

Palantir Technologies Inc. builds and deploys software platforms for the intelligence community to assist in counterterrorism investigations and operations in the United States, the United Kingdom, and internationally.

• Strong execution in U.S. commercial business and U.S. government business acceleration suggests a robust increase in revenue, attributed to the enterprise AI market opportunity and strategic contracts, positioning Palantir for higher future earnings.
  
• Expansion deals with existing customers and a surge in U.S. commercial ACV indicate improving net margins through increased utilization and efficiency of Palantir's software solutions.
  
• High demand for AI production, reflected in significant U.S. commercial revenue growth and TCV bookings, points to a solid expansion in revenue and a positive outlook on earnings.
  
• Notable government contracts and awards with the Department of Defense and other agencies underscore a strong growth trajectory in revenue from the government sector, underpinning future profitability.
  
• Launch of new offerings and strategic commitment to American reindustrialization, such as Warp Speed, aimed at modernizing manufacturing operations, indicates potential for revenue expansion and enhanced market penetration in new and existing sectors.

Assumptions

• Analysts are assuming Palantir Technologies's revenue will grow by 22.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.3% today to 20.2% in 3 years time.
• Analysts expect earnings to reach $914.9 million (and earnings per share of $0.41) by about August 2027, up from $404.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $856.8 million in earnings, and the most bearish expecting $542.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 84.1x on those 2027 earnings, down from 146.4x today. This future PE is greater than the current PE for the US Software industry at 37.0x.
• Analysts expect the number of shares outstanding to grow by 5.12% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.58%, as per the Simply Wall St company report.

Risks

• Dependence on U.S. government contracts could expose Palantir to significant risks, as changes in government priorities or budget constraints could lead to reduced revenues.
  
• Rapidly evolving AI enterprise market and intense competition pose risks to maintaining and growing market share, potentially impacting future revenue streams.
  
• High expectations for transitioning customers from prototype to production could face operational challenges, impacting profit margins if the transition does not scale as anticipated.
  
• Global expansion efforts face geopolitical and regulatory risks, which could affect international revenue growth and overall market penetration.
  
• The strategic shift towards manufacturing with initiatives like Warp Speed involves significant execution risk and requires substantial investment, which could impact net margins if not successfully implemented or adopted.

Valuation

• The analysts have a consensus price target of $24.56 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 $38.0, and the most bearish reporting a price target of just $9.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.5 billion, earnings will come to $914.9 million, and it would be trading on a PE ratio of 84.1x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of $26.59, the analyst's price target of $24.56 is 8.3% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.