Summary
Despite Palantir Technologies stock's volatility and recent sell-offs, I maintain a long-term buy rating, believing the company has not yet reached its full potential.
Palantir's strong government and military contracts, particularly with the U.S. Army and AI initiatives, highlight its competitive advantages and growth prospects.
I expect Palantir's EPS to exceed $1 by 2026, driven by rising profit margins and revenue growth between 20% and 30% annually.
The biggest risk is share dilution; however, PLTR's unique position and exceptional AI capabilities make it a compelling long-term investment.
Palantir Technologies
Investment Thesis On Palantir
Seeking Alpha Rating History
The chart above shows the rating history since I first gave Palantir Technologies Inc. a Buy rating. And that was at a time when there were plenty of sell articles because Palantir was out of favor with investors. The consensus at the time was that the company was wildly overvalued, stock-based compensation (“SBC”) costs were far too high, and Palantir was pure hype.
Strangely enough, this sentiment changed after Palantir's strong run-up, and suddenly Palantir was hyped and there were many articles with buy recommendations. Unfortunately, only after the strong price increase. Recently and weeks, however, sentiment has shifted again, as the number of sell articles has once again far outnumbered the number of buy or hold articles.
And I can thoroughly understand anybody who made a killing on Palantir and wants to lock in their profits by selling because Palantir is a very volatile stock. At the same time, I believe that Palantir is far from reaching its full potential and that Palantir remains a buy for the long term. In 10 years, I think Palantir will be much bigger than it is today. I therefore maintain my buy recommendation, as I am investing for the long-term and short-term setbacks, which are highly probable, will not deter me from believing in long-term success.
Palantir's Contracts
Palantir's new contracts often receive a great deal of attention from the media. In December, for example, it was announced that the U.S. Army, which has been working with Palantir since 2018, had extended the partnership with a $600 million contract for four years. And for me, the fact that the world's best-equipped army has relied on Palantir for nearly 7 years is a testament to the quality of Palantir's work. Also in December, Palantir was announced as the lead software integrator for USSOCOM's Mission Command System.
Most importantly, on December 6, Palantir and Anduril announced a partnership to ensure the U.S. government is a leader in AI. In fact, this partnership has the plan to ensure that all government data collected can also be used to work with. If it works, which I expect it will, there will be a huge leap in efficiency and understanding of how the real world works. Only Palantir, in my opinion, can ensure that this highly confidential data is handled with the utmost care while delivering excellent results. This is one of the biggest competitive advantages that exists today.
And since it seems to me that military spending will increase rather than decrease in the future, Palantir should benefit. Especially since they have a unique position in that many governments and agencies work with them.
What Does The Future Hold For PLTR?
Whether Palantir underperforms the index this year is not relevant to me because I think in 5-year intervals. However, for people who have a more short-term investment style, the risk of short-term underperformance is obviously high. After such a strong rise in 2024, it will be difficult to continue it. After all, it is often the case that what goes up fast tends to come down fast as well.
Data by YCharts
Since Palantir hasn't been public long, there isn't much of a comparable period, but it's clear that the forward P/E ratio is lower than it was in early 2022. But right now, Palantir's multiple of 142x is slightly higher than the 121x average for the period. However, I strongly suspect that the forward P/E will soon fall back below 100x as sales increase.
The low of 25x in January 2023 was incredibly undervalued, and anyone who bought it was rightly rewarded with a fantastic return. But in retrospect, it always looks easy, and the fewest really bought it at that point because you could read negative things about Palantir almost everywhere. The emotional part was very difficult.
Data by YCharts
What I do not like currently, or what I do not find appropriate, is that the P/S multiple is often mentioned. Of course, it is very high, but Palantir is a company that generates real earnings, so why should you use the P/S multiple? That makes no sense to me. I think an analysis of earnings or cash flows is much more appropriate, and then also with a view to the future. Because what matters is where the cash flows will be in 5 years. Because if the cash flows in 5 years are significantly higher, even companies with exorbitant multiples can be undervalued.
Amazon (AMZN), Tesla (TSLA), Microsoft (MSFT), and many others were undervalued despite their high multiples because they simply had huge competitive advantages and were beating almost all estimates. And I think that also will be the case with Palantir because I see them in an extraordinary position. In order not to repeat too much of my old articles here, I recommend reading my two older articles if you are interested. But in short, Palantir has enormous barriers to entry through its customer relationships, security clearances, and the cost of switching is enormous because Palantir has become the heart of many operations. They also have a huge head start in terms of knowledge and insight that their competitors do not have.
EPS Estimates
Seeking Alpha Earnings Estimates
In contrast to my last article, the estimates have been raised. They are now at $0.38 for FY24 and $0.48 for FY25, up from $0.36 and $0.43. In addition, analyst estimates are starting to emerge for FY26 and beyond, and the current expectation is that EPS will exceed $1 for the first time in 2029. I think it will happen much sooner, and the market is still too pessimistic here.
I continue to believe that the $1 mark will be broken in 2026, possibly as early as 2025. And a nearly 60x 2026 P/E multiple for the best AI defense company seems reasonable to me. Unfortunately, quality comes at a price. And if Palantir were to hit $2 EPS by the end of FY29, a 60x multiple would be enough to double the stock and generate a near 15% annual return.
Data by YCharts
As you can see, Palantir's profit margin is trending up, and when we combine that with revenue that is likely to grow between 20% and 30% per year, EPS is going to grow rapidly over the coming years. I believe that the profit margin will continue to rise until 2029 and then will be more in the range of 35%+ and I also believe that the revenues will be above $10 billion per year. These are ambitious goals, but for Palantir to succeed, they must be achieved. Because to reach $2 EPS in 2029, Palantir would need to generate $4 billion in profits, as there are nearly 2 billion shares outstanding.
But with the competitive advantages and some of the best AI minds in the world, I believe Palantir can do it.
Risks
Data by YCharts
The biggest risk to my thesis is that Palantir continues to issue too many shares and does not start buying back shares on a larger scale in the near future. The more shares in circulation, the more profit the company needs to generate to reach $2 earnings per share in 2029. Ideally, shares outstanding will be pushed below 2 billion as FCF is used to reward shareholders.
ARK Shed $15m In Shares
The news that the ARK Innovation ETF (ARKF) has sold $15 million worth of shares of Palantir stock may have caused a bit of a sell-off in the stock. But I don't think you should read too much into it, especially considering when ARK sold most of its Nvidia (NVDA) shares. And secondly, $15 million is also minimal when you look at the amount of assets that ARK manages and the fact that the position still exists. They are just taking some profits, which is understandable after such a fantastic run in 2024.
Furthermore, I find that ARK has a good understanding of identifying future winners, but unfortunately, they have sold these partly too early. It is not without reason that one says that one should let his winners run because one is enough to compensate for all losses.
Conclusion
That companies like Alphabet (GOOG), Microsoft, or Apple (AAPL) could sustain annual growth rates exceeding 20% was often thought to be impossible, but they have done it. And I think Palantir is a company that belongs in that group and can deliver extraordinary growth rates over time. This means that I think the market still underestimates how much and how long Palantir can grow, which is why I think the company remains attractive for long-term investors. Over 5 to 10 years, earnings growth matters more than the entry multiple.
The multiple is high right now, but the earnings growth will more than makeup for it. And if Palantir does fall, it will give long-term investors a chance to get into the stock cheaper or buy more. So to put my money where my mouth is, I, personally, bought some more Palantir stock.
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