Going Into Earnings, Is Palantir Stock a Buy, a Sell, or Fairly Valued?

Palantir Technologies PLTR is set to release its first-quarter earnings report on May 5. Here’s Morningstar’s take on what to look for in Palantir’s earnings and outlook for the stock.

Key Morningstar Metrics for Palantir Technologies

• Fair Value Estimate: $90.00
• Morningstar Rating: ★★★
• Economic Moat: Narrow
• Morningstar Uncertainty Rating: Very High

Earnings Release Date

• Monday, May 5, after the close of trading

What to Watch for in Palantir Technologies’ Q1 Earnings

• Palantir’s contribution margin (which measures how much revenue is kept after delivering the software and operating it for the end customer) has been ticking steadily up in recent quarters, and is now around 60%. An increase above 60% would signify increasing cost discipline and some pricing power.
• With a typical software company, you expect gradual compression in net dollar retention as it matures and reaches a steady state penetration. What Palantir is doing is pretty remarkable; they have been around for 20 years and are still receiving new AI tailwinds. This is increasing their realization of expansion and upsell opportunities, which translates into more NDR. 
• International revenue has been falling over the past few quarters as a percentage of total revenue, which shows penetration is going really well in the United States and that penetration could be going better in Western Europe. Europe has lagged, and if it catches up, we see the stock repricing and trading closer to $200 per share.
• Palantir announced NATO will buy an AI-enabled “Maven Smart System” which allows for battlepace awareness, planning, and target identification. The deal, announced on April 14, was finalized on March 25, so we think it will lift first-quarter financials. This highlights that even despite persistently lower Western European GDP growth and debates over NATO’s 2% GDP spending target, there is robust demand for Palantir’s AI-powered defense solutions.

Our Valuation of Palantir Stock and the Outlook Going Forward

• There is no doubt that high expectations are built into this stock, and it looks high relative to peers, but we believe this company has the competitive advantages to justify its multiple. 
• Even if there are budget cuts in the government for non-essential and DEI-related initiatives, Palantir is unlikely to be affected. Its software increases military preparedness and facilitates a leaner cost structure.
• Talk of Pentagon spending cuts in February sparked a selloff in the stock, but the market didn’t truly appreciate the mission-critical nature of Palantir’s software, which makes it largely “untouchable.” There is no other software company more equipped to drive down non-essential expenses. If we see continued progress in the metrics, we will be inclined to increase our fair value estimate. 

Fair Value Estimate for Palantir Technologies

With its 3-star rating, we believe Palantir’s stock is fairly valued compared with our long-term fair value estimate of $90 per share, implies a 2025 enterprise value/sales multiple of 52 times.

In our opinion, the primary driver of the stock’s value is the total addressable market Palantir’s software can ultimately serve. TAM size is truly a trillion-dollar question that is unfortunately laden with assumptions. Our base case has Palantir’s TAM growing to $1.4 trillion by 2033. From today, we assume growth is non-linear, with an inflection higher from 2028-30 to rates nearing 40% per year. Our analysis concludes that we are in the early innings of an AI revolution. In our base case, we expect Palantir to have a growth profile similar to that of innovative software companies like Salesforce in the late 2010s. Salesforce was able to drive efficiency by creating a standardized workflow and logging process for enterprises that were accustomed to bloated sales teams compiling data in disparate locations. We expect Palantir to similarly drive efficiency amongst enterprises that now lean on large information technology teams that interpret and present data to assist in decision-making.

Read more about Palantir Technologies’ fair value estimate.

Economic Moat Rating

We believe Palantir warrants a narrow moat rating, based on switching costs and intangible assets. Companies like AWS, Snowflake, and ServiceNow have developed data analytics tools, but Palantir differentiates itself as the only AI company with a framework that organizes disparate datasets and facilitates optimized decision-making. This machine-learning framework that identifies opaque yet significant relationships in data and translates solutions to the end user is referred to as the “ontology framework.”

Palantir engineers a read-write feedback loop that enables connectivity throughout a business, creating an accessible analytical framework to drive nuanced decision-making that improves over time. Palantir often competes against internal information technology departments because it also analyzes data and create information dashboards for interpretation. This traditional in-house IT and data aggregation framework often results in patchwork solutions that are cumbersome, difficult to improve, and costly to scale.

Read more about Palantir Technologies’ moat rating.

Financial Strength

We view Palantir’s financial position as healthy and improving. As of December, the firm had nearly $2 billion in cash and $3.1 billion in marketable securities (mostly US Treasury securities) and no debt. Its liquidity position improved by $1.5 billion in 2024.

Palantir now has two full years of GAAP profitability under its belt, with 2024 over twice as profitable as 2023, and we expect rapid growth and profitability to continue. In the past, Palantir has had dilution concerns revolving around high stock-based compensation, which puts a non-cash drag on profitability. We saw a significant one-time stock-based compensation expense of $120 million in the fourth quarter of 2024 triggered by the stock price exceeding $50 per share, but we do not expect this to be a trend.

Read more about Palantir Technologies’ financial strength.

Risk and Uncertainty

We assign Palantir a Very High Uncertainty Rating. The company’s biggest uncertainty is the broad potential size of the total addressable market, or TAM, that its software can serve, and the level of customer penetration it can achieve.

We like the versatility of the ontology framework that makes Palantir software valuable to almost any company. This versatility creates significant upside potential. Unfortunately, because the TAM estimate is so uncertain and is one of the largest drivers of the stock’s valuation, downward share price corrections can be severe and painful when there is an unfavorable change in investors’ perception of future market size. We have modeled multiple scenarios for future demand, and the resulting range of valuations is extreme, illustrating the massive uncertainty investors face. If our bear case on TAM emerges, the shares will likely prove worth far less than we expect.

Read more about Palantir Technologies’ risk and uncertainty.

PLTR Bulls Say

• Palantir has developed the premier AI software, primed to take advantage of the trend toward digitization and automation. AI software maintains a strategic position on the AI-value chain.
• Palantir’s ontology framework and AI orchestration allow for the democratization of machine learning. Its software is useful to employees at all levels of a business to drive efficiency enhancements.
• The new boot camp-style sales effort has allowed Palantir to achieve rapid growth in the US commercial segment. The US commercial business has a large total addressable market.

PLTR Bears Say

• Palantir’s end markets are confined to entities that coalesce with the Western ethos. This caps the total addressable market.
• The decreasing cost of AI inference and the convergence of LLMs will result in lower barriers to entry in the AI decision-making software industry that Palantir currently dominates.
• Palantir’s dual-class share structure opens the door for overzealous noncore investment opportunities without common shareholders’ checks and balances.

This article was compiled by Gautami Thombare.