Summary

• Palantir's impressive big-data and AI growth is hard to ignore, especially after the recent dramatic share price sell off.

• Recent negative news items have created fear and caused valuation multiples to come down (a good thing). Shares are increasingly tempting.

• After reviewing the opportunity (including growth, valuation, and risks), this report concludes with our opinion on investing in PLTR stock.

• Looking for a helping hand in the market? Members of Big Dividends PLUS get exclusive ideas and guidance to navigate any climate. Learn More »

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Palantir, Blue Harbinger

Fasai Budkaew

Palantir

Palantir

If you like to invest in high-growth megatrend companies, then big-data and AI software leader, Palantir (NASDAQ:PLTR) (NEOE:PLTR:CA), is hard to ignore. And considering the shares are down more than 30% (from fresh all-time highs) in recent weeks (on AI market fears), investing in Palantir just got a lot more tempting (especially considering the AI megatrend is still in its early innings). This report reviews Palantir's business (including growth, valuation, and risks) and then concludes with our opinion on investing.

About Palantir

Palantir is a big data analytics company that has been experiencing accelerating growth thanks largely to AI. Its two main software platforms, Gotham and Foundry, help government agencies and non-government enterprises turn massive raw data sets into actionable insights. And the successes are being accelerated by Palantir's relatively new Artificial Intelligence Platform ("AIP").

High Revenue Growth

What makes Palantir particularly interesting is its dramatically increasing revenue in recent quarters (see below).

Palantir Shareholder Letter

Palantir Shareholder Letter

Palantir Shareholder Letter

Palantir Shareholder Letter

The revenue growth is driven by existing government business (which is hard to break into, but very sticky and lucrative once you get it) and accelerating commercial revenue growth (which continues to thrive in the face of naysayers). And of course, the growth is also driven by the ongoing (early inning) AI megatrend. Specifically, Palantir is successfully integrating advanced AI capabilities into its platforms, thereby allowing clients to automate and improve decision-making quickly.

Here is what CEO, Alex Karp, had to say about it in the first sentence of his latest shareholder letter:

"We are still in the earliest stages, the beginning of the first act, of a revolution that will play out over years and decades."

Palantir Earnings Growth:

And importantly, all this rapid revenue growth is helping the company turn the corner from negative earnings per share ("EPS") to positive EPS, as you can see in the chart below (this is a good thing).

Ycharts

YCharts

Palantir now has impressive operating leverage to continue growing earnings, considering it is starting off a low EPS basis. Specifically, earnings were 20 cents per share over the last 12 months, versus a recent share price of $84 (especially considering revenue per share over the last twelve months was $1.17, and it's accelerating).

Why the Share-Price Selloff?

As you can see in the chart below, Palantir shares have sold off hard, down more than 30% from recent all-time highs.

Ycharts

YCharts

Palantir shares are down as part of a broader AI market selloff (see 10-day return column below for additional top AI stocks down big). In particular, news of potential AI spending cuts by Microsoft (MSFT)) spooked investors. Additionally, Palantir shares have faced pressure from announced US defense budget spending cuts (Palantir generates significant revenue from government contracts), and also because CEO Alex Karp announced an adjusted plan to sell Palantir shares.

Stock Rover

data as of Friday's close (2/28/25), source: Stock Rover

While these factors are important to consider, they're likely just a blip on the long-term AI megatrend. For example, Microsoft explained infrastructure spending hasn't changed, government spending cuts may actually be a boon to Palantir (more on this later) and Karp's sales are part of a common 10b5-1 trading plan. In a nutshell, Palantir shares are down because investors are fearful, and fear often creates opportunity.

Valuation Multiples vs. Business Fundamentals

Despite recent volatility, Palantir's business has been fundamentally strong, and it continues to be on a high-growth trajectory (especially considering the ongoing AI megatrend). However, there is a big difference between fundamental growth and valuation multiples.

From a valuation standpoint, Palantir shares are NOT cheap (even after the selloff). For example, at 72.5x sales, 179.8x forward earnings and with a forward PEG ratio of 3.6x, Palantir is one of the most expensive AI stocks in the table above.

And as many people learned during the dot com bubble (when many "dot-com darlings" had dramatically overstretched valuations, as per the graphic below) it can take a long time for fundamentally strong business to achieve meaningful share price gains when valuation multiples are particularly high (as they are for Palantir now).

S&P, Sparkline

S&P, Sparkline

The point is that even if Palantir's business' remains fundamentally strong (which it likely will) the valuation is already stretched (its already pricing in many years of growth as if it already happened) and the forward returns to Palantir shareholders may lag the business's ongoing fundamental growth.

For example, just as dividend investors often make the mistake of investing based only on a stock's current dividend yield (instead of also considering the total return potential, i.e., dividend income plus price appreciation potential), growth investors often make the mistake of investing based only on fundamental business growth (instead of also considering the current valuation multiples-and Palantir's are still relatively high).

However, in Palantir's defense, the company's earnings just recently turned GAAP positive (see chart below), and it is working off a very small EPS base and thereby leaving lots of room for earnings growth (for example, you can see in the earlier table that Palantir has a much higher 5-year EPS growth estimate than most of the other companies-a good thing!).

Stock-Based Compensation

Also worth considering, Palantir's earnings have been hamstrung by very high stock-based compensation (see chart below), which has been dilutive to investors.

Ycharts

YCharts

However, stock-based compensation has been slowing (as a percent of revenues) and this is a good thing going forward (relative to Palantir's history).

Government Spending Cuts

As mentioned, recent news of government spending cuts, particularly related to defense, is a big risk for Palantir. According to NPR:

"The Pentagon has proposed cutting 8% of its budget in each of the next five years - amounting to some $50 billion each year - but prioritized 17 areas from drones and submarines to military assistance for the southern border as well as increased funding for the U.S. command that focuses on China."

On the surface, this appears to be bad news for Palantir, considering its significant reliance on government contracts. However, it may also be a boon as expensive government consultants may be cut and replaced by AI software, such as Palantir.

Remember, Palantir's AI Platform ("AIP") integrates AI with big data analytics, thereby allowing organizations to build and deploy custom AI models for decision-making and operational efficiency. Nonetheless, government spending cuts are a risk factor that investors need to consider.

The Bottom Line

Palantir remains one of the most fundamentally-attractive, high-growth, disruptive business models in a while-thanks in large part to high revenue growth being accelerated by the AI megatrend. However, it also faces significant risk factors (including a high valuation, stock-based compensation, and government spending cuts).

A decade from now, Palantir will likely be a dramatically larger business, and the shares may also be trading at a much higher price. And given the recent volatility and steep price decline, Palantir shares are increasingly tempting for purchase.