Summary

• Despite Palantir's strong financial performance and growth, I believe the stock is absurdly overvalued, prompting a downgrade to a ‘strong sell’.

• Palantir's revenue surged 36% to $827.5 million, driven by significant growth in both commercial and government sectors, particularly in the US.

• The company boasts a robust balance sheet with $5.23 billion in cash and no debt, yet its valuation remains unjustifiable even with aggressive growth assumptions.

• Even under the most optimistic growth scenarios, Palantir's future cash flow and EBITDA multiples are excessively high, indicating a significant overvaluation.

• My name is Dan Jones. I have degrees in accounting and economics, and ran a registered investment advisor for nine years. I lead the investing group Crude Value Insights.

Palantir Technologies headquarters campus exterior view in Silicon Valley. - Palo Alto, California, USA - 2019

Contrary to what academics have long suggested, the market is not a place of efficiency., it does incorporate new information almost instantly. However, there are many instances where animal spirits prevail and shares of companies become either overvalued or undervalued. A case of overvaluation, in my opinion, involves none other than technology giant Palantir Technologies Inc. (NASDAQ:PLTR). Back in November of last year, I downgraded the company from a ‘hold’ to a ‘sell’. From a purely fundamental perspective, the business was doing great. Revenue and cash flows were surging, and the business was continuing to build up a hefty net cash position. At the end of the day, however, I could not get past the valuation of the company. Even assuming rapid growth, the stock did not make sense to me.

Since that time, the market has continued to push shares irrationally higher. Strong financial performance and expectations of continued growth have caused the share price to climb 66.4%. That's at a time when the S&P 500 is up only 3.1%. While I do acknowledge that the fundamental condition of the company is certainly better than I expected it to be, and while I expect that trend to continue moving forward, I do think the stock has gotten absurdly expensive. In fact, as a result of this, I am left with no choice but to downgrade the company to a ‘strong sell’.

Be worried

Financials

On February 3rd, the management team at Palantir Technologies reported financial results for the third quarter of the company's 2024 fiscal year. In almost every respect, the company did quite well. As an example, revenue for the firm came in at $827.5 million. That's an increase of 36% compared to the $608.4 million the company reported one year earlier. A lot of this growth came from the commercial side of the business. Commercial growth for the company skyrocketed 31% from $284 million to $372 million. It's driven by a rise in the number of commercial customers that the company has to 571. That compares to the 498 reported just one quarter earlier, and it's up about 52% compared to the 375 the business had at the end of the final quarter of 2023.

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When it comes to the US side of things, the commercial customer account for the company jumped 73% year over year from 221 to 382. This resulted in US commercial revenue skyrocketing 64% from $131 million to $214 million. Early on in its life, Palantir Technologies made a name for itself focusing on government customers. But over the past couple of years now, the company has made a concerted effort to grow into the commercial side of the economy. This has been spurred especially by the rise of AI and the impact that could have on the firms that exist out there today. This strategy has proven to be very effective and was perhaps the best decision management ever made.

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This is not to say that the company has not enjoyed continued growth on the government side. Total government revenue jumped year over year by roughly 40% from $324 million to $455 million. This was an even greater growth rate than what the company saw on the commercial side of things. At the end of 2024, the firm had 711 customers. This means that 140 of its customers were on the government side of things. That's an increase of 15% compared to the 122 customers the business had that were government agencies. Not surprisingly, much of this expansion on the government side of the business was driven by the US. Here at home, government revenue soared 45% from $237 million to $343 million.

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Moving forward, it is all but certain that continued growth will occur. This is because the company continues to lock down contracts that will create significant value in the long run. During the final quarter of 2024 alone, the firm closed 129 deals that had a value of $1 million each or more. 58 of these are valued at $5 million or more, with 32 of them being worth $10 million or more. Before I get into what this might mean for 2025 and beyond, I do think I should touch on the bottom line and discuss, in more detail, what 2024 as a whole looked like.

Presentation

On the bottom line, the firm did generate a net profit of only $79 million. That was down from the $93.4 million reported the previous year. However, during this time, the business did see a negative impact associated with stock appreciation rights. Without this, profitability would have been higher as the image above illustrates. We can actually see the bottom line improvement for the business when looking at adjusted profits and cash flows. Year-over-year, the adjusted net income for the business expanded from $189.6 million to $341.9 million. Operating cash flow jumped from $301.2 million to $460.3 million. If we adjust for changes in working capital, we get an increase from $218.6 million to $356.2 million. And finally, EBITDA for the firm expanded from $217.3 million to $379.5 million.

Financials

Author - SEC EDGAR Data

In the chart above, we can also see financial results for 2024 as a whole relative to 2023. Revenue, profits, and cash flows, all grew on a year-over-year basis. The exciting thing is that management also expects continued growth this year. They anticipate revenue, if it hits the midpoint of guidance, of $3.749 billion. That would represent an increase of 30.8% compared to the $2.866 billion reported for 2024. In terms of profitability, management said that the midpoint of guidance for adjusted operating income would be $1.559 billion. Seeing as how this is heavily correlated with cash flows, it would likely translate to an adjusted operating cash flow of $1.692 billion and EBITDA of $1.603 billion.

Presentation

This is exciting. However, even this rapid growth is unlikely to justify the picture for the business in the long run. But before I get into my projections for the future, I do think a couple of other things are noteworthy. The first thing that I would like to point out is that the company's balance sheet continues to show improvements. During the quarter, the company had $5.23 billion in cash and cash equivalents on its books. This is up nicely from the $4.56 billion reported in the third quarter, and it compares favorably to the $3.67 billion the company ended 2023 with. Seeing as how the firm has no debt, this means that these cash figures are extra capital the firm can use without having to rely on paying back debt. Firms of this nature do deserve to trade at some sort of premium compared to those that are indebted. But even with this, I think the price is impossible to justify.

Financials

Now, when it comes to my model, I would like to make a very clear other point. And this is the fact that I am using some very aggressive assumptions regarding what the future might look like. Keep in mind that revenue growth this year is projected to be 30.8% year over year. For the future, I decided to assume that there would be three different scenarios. The first is a slowdown scenario where revenue would climb at 20% per annum after this year. The second assumes that revenue will continue growing at 30% per annum. And then, there is the aggressive scenario where I assume revenue will climb to 40% per annum for 2026 and 2027.

Financials

Another thing to take into consideration is margin improvement. In the chart above, you can see what the adjusted operating cash flow margin and the EBITDA margin for the company have been for 2023 and 2024, as well as what has been estimated for 2025. The chart also shows what these margins look like using the most recent quarter, which would be the final quarter of 2024, and with that looks like compared to the final quarter of 2023. Historically speaking, we have seen margin improvement as the company scales. So for the purpose of my model, I have assumed further expansion. For 2026, I assumed that adjusted operating cash flow would come in at 50% of revenue. And for 2027, I increased that to 55%. When looking at the full fiscal years, we can see that the EBITDA margin for the company has generally fallen short of the adjusted operating cash flow margin. So I have assumed a 300 basis point reduction for it compared to the adjusted operating cash flow margin.

Estimates

Taking all of this into consideration, we can see the slowdown scenario with 20% annual growth in the table above. In this case, by 2027, the company would be generating about $5.40 billion in revenue. Adjusted operating cash flow would be $2.97 billion, while EBITDA would come in at $2.27 billion. While this is an impressive amount of growth compared to what the company generated last year, if the stock price doesn't change from where it is today, we would be looking at a price-to-adjusted operating cash flow multiple of 82.7 and an EV-to-EBITDA multiple of 106.1.

Estimates

In the next table above, you can see the 30% annual growth scenario. And in the table below, you can see what happens if revenue grows at 40% per annum. Even in this most aggressive case that I considered to be possible, the firm is still trading at 60.8 times future operating cash flow and at 63 times EBITDA. Depending on how much cash is ultimately retained from operations, the EV-to-EBITDA multiple might decline to some extent. But we are still looking at multiples that are in the stratosphere.

Estimates

Takeaway

To be honest with you, the valuation at which Palantir Technologies is trading seems to me to be the very definition of insanity. This doesn't mean that I am bearish about the company from an operational standpoint. I do think that, as AI continues to dominate the economic landscape, the firm will do quite well. But there is a big difference between doing well and making sense from an investment standpoint. Even incredibly aggressive growth assumptions make the stock look horrifyingly overpriced. In the short term, I would not be surprised to see the stock continue climbing. But at some point, I believe that the chickens will come home to roost. Because of how overvalued shares appear, I have no choice but to downgrade the company to a ‘strong sell’.