Palantir Stock Surges After Earnings as AI Sales Impress

Key Morningstar Metrics for Palantir

• Fair Value Estimate: $15.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Very High

What We Thought of Palantir’s Earnings

We are raising our fair value estimate for narrow-moat Palantir PLTR to $15 from $13 after the firm reported another strong quarter, with impressive sales growth matched by an increasingly attractive margin profile. Palantir’s AI platform, or AIP, continued to provide an uplift to the firm’s commercial sales as customer interest in Palantir’s AI solutions remained robust. We remain optimistic about Palantir’s growth opportunities in the AI space and expect robust sales expansion on the back of its AI solutions as more organizations adopt AI. Despite our bullish, above consensus growth and profitability assumptions, we are unable to rationalize Palantir’s current valuation. With shares up double-digits after the earnings report, we continue to view them as overvalued relative to our updated fair value estimate. Palantir’s fourth-quarter sales clocked in at $608 million, up 20% year over year and ahead of the high end of management’s prior guidance range. Sales from U.S. commercial clients continued to spearhead Palantir’s revenue growth, expanding 70% year over year to $131 million.

We believe strong adoption of AIP within the U.S. commercial space is a good sign for Palantir as U.S. companies are often early adopters when it comes to software, with other global markets following suit. We were equally impressed by the firm’s strong forward-looking metrics, with remaining performance obligations and billings both up strongly year over year and outpacing revenue growth. Alongside strong sales expansion, Palantir also reported improved profitability, with fourth-quarter adjusted margins coming in at 34%, up from 22.5% a year ago. While the firm focuses on profitability with a keen eye on S&P 500 inclusion, we believe the marked improvement in Palantir’s margins points to the inherent operating leverage built into moaty software businesses. Alongside fourth-quarter results, Palantir provided its first outlook for 2024. The firm’s initial financial targets for 2024 include sales of $2.66 billion and adjusted operating income of $842 million, both at the midpoint of the guidance ranges. We view the revised targets to be conservative and are modeling Palantir to exceed these targets as the firm experiences continued demand for AIP as well as its older platforms, Foundry and Gotham.