What Is a Fair Price for Palantir?

Palantir Technologies (NYSE:PLTR) has successfully ridden the AI wave of the last two years to produce outstanding shareholder returns.

The stock traded at less than $7 as recently as the beginning of 2023 but has since risen by over 6x. This sudden spike in prices begs the question of whether the market is valuing Palantir appropriately today.

What’s a reasonable valuation for Palantir now, and does the stock have the potential to delivering market-beating returns for its investors going forward?

Palantir’s Performance

As one might expect from the stock’s rapid ascent, Palantir has been delivering very solid financials recently.

The company’s revenue has grown from $1.91 billion in 2022 to a trailing 12-month total of $2.48 billion as of the end of Q2. Even more important is the fact that the company has become profitable during the same time period.

Palantir reported its first quarterly profit of $31 million in Q4 of 2022. In Q2 of this year, the company reported net income of $134 million.

Another major aspect of Palantir’s performance has been the growth of its data analytics and AI services in the world of private commerce.

Palantir has a long history of providing these services to government agencies, a business model that has allowed it to secure lucrative long-term contracts. Q2’s report but saw commercial revenues grow by 33% to reach $307 million.

Growth in this field accounted for a substantial amount of the company’s 27% year-over-year total revenue growth. Alex Karp’s firm was also able to boost its total customer base by 41%.

Palantir is posting very strong margins too, suggesting that the company has reached the point where it can generate sustainable profits from its growing revenues.

GAAP net margin in Q2 was an impressive 20%, resulting in a record quarterly profit. Assuming Palantir can continue to build its revenues at high rates, this trend suggests that future profit growth will likely be quite strong as well.

How Does Palantir’s Valuation Look?

By practically any standard, PLTR is extremely expensive at current prices. At 121x projected earnings, 452x cash flow, 39x sales and 23x book value, Palantir is priced on extremely high future growth assumptions.

While the company is certainly performing well at the moment, investors run a very real risk of overpaying with value multiples this high.

Palantir’s growth prospects are, of course, still quite strong. The company’s earnings per share are expected to grow at a compounded rate of about 24.5% over the next five years. The problem is that the stock’s current valuation appears to have already overrun that expected growth.

Using the company’s trailing 12-month EPS of $0.19 and assuming a 3.5% discount rate to reflect lower likely future interest rates, a discounted cash flow analysis would only price PLTR shares at about $15.40.

In fact, even if the expected growth rate held steady for 10 years, the stock’s value would still only be a little over $40. Barring even higher growth rates than expected, Palantir is already trading above its intrinsic net worth.

Examining Analyst Price Forecasts for Palantir

The view on Palantir’s value laid out above also seems to be prevalent among Wall Street analysts. The median 12-month target price for PLTR is currently $27 per share, a price that would imply a drop of more than 37% from the current level.

It’s worth noting just how large the range of forecasts for Palantir is. Price targets run all the way from $9 per share to $50, suggesting returns that range anywhere between -79% and 15%.

What does seem apparent is that even the most bullish forecasts lead to respectable but far from stellar returns. Taking this and the stock’s extremely high valuation into account, it seems likely that there’s more downside risk than upside potential in Palantir at the moment. This likely accounts for the Sell rating issued by a little over a third of the analysts covering the stock.

How Are Palantir’s Financials?

A final factor to consider in Palantir’s long-term picture is its financial status. Here, the company looks very good.

Palantir carries essentially no long-term debt and maintains a more than 5-to-1 ratio between its current assets and current liabilities. The company’s position is also bolstered by a reserve of cash and cash equivalents that exceeds half a billion dollars.

Although the intrinsic value in Palantir is almost certainly more in its ability to generate future cash flows than its current assets, this does once again suggest a substantial overvaluation of the stock relative to its assets.

So, What’s a Fair Price for Palantir?

Fair value for Palantir at this time sits at $27.53 per share according to the consensus of 16 analysts, suggesting material downside risk at this time.

With that said, Palantir is a fast-growing company that is quickly establishing a moat within its industry. The business is already profitable and will very likely continue growing.

Even better, Palantir has a very strong balance sheet that allows it to invest in growth initiatives rather than allocating capital to debt service. Taking all of this into account, it’s safe to say that Palantir appears to be a very strong business with a bright future ahead of it.

It seems equally apparent that the market has allowed enthusiasm for Palantir to drive share prices up well beyond their probable fair value.

Though the company will very likely continue to deliver strong growth well beyond the 5-year time horizon, the current valuation suggests earnings growth of over 20% annually for over a decade.

These assumptions would seem to be a best-case scenario with little room for economic slowdowns, competitive pressures or anything else that could hamper Palantir’s growth story.

All things considered, Palantir shares are likely worth somewhere in the $25-30 range. The company’s performance justifies a premium pricing, but the current premium simply appears too high to be sustainable under anything but ideal circumstances. With prices currently running so high, Palantir may not be a particularly attractive stock to buy in today’s market.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.