Palantir’s stock is trading at 73 times its revenue, nearly a 400% premium over other artificial intelligence (AI) software companies which Giarelli believes might not be justifiable from a simple earnings beat.
“We believe the premium multiple creates high expectations where management's 4% guidance raise on 2025 revenue appears underwhelming. It has reached a point where respectable earnings beats and raised guidance aren't enough to materially move the stock to the upside,” Giarelli states.
While Palantir’s sky high valuation might be riding on high expectations, these expectations appear to be justifiable given the firm’s high commercial customer growth, with US commercial customer numbers growing 65% year-on-year (y-o-y) according to their Q1 results.
Additionally, the firm also saw the size of secured deals increasing, with a doubling of agreements worth more than US$1 million y-o-y.
The firm continues to grow its involvement in the US government sector and has landed many contracts in the past years. This includes a US$480 million award from the Pentagon's Chief Digital and Artificial Intelligence Office to provide its Maven AI warfighting code to the entire Department of Defense.
More recently, Palantir received a US$30 million contract to build a platform to track migrant movements in real time from the Immigrations and Customs Enforcement (ICE) agency back in mid-April.
Looking forward, Giarelli foresees a good outlook for the firm especially from US government contracts.
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“We believe that the Department of Government Efficiency, the Golden Dome US missile defence system and a potential US$1 trillion-plus national security budget serve as tailwinds for Palantir's growth in the coming years,” says Giarelli.
With Palantir’s broad applicability, the firm is expected to thrive from an increase in global digitalisation and an increasing adoption of AI agents which will help fuel expectations of the size of Palantir’s total addressable market and the firm’s ability to penetrate that market.
While the US has been a fast adopter of AI solutions, Palantir’s management has highlighted that Europe remains a laggard in the adoption of such solutions. As a result, European revenue as a percentage of total revenue has been declining which Giarelli hopes can be improved.
In its recent quarter, Palantir finalised a contract with the North Atlantic Treaty Organisation (NATO) for its AI-powered Maven Smart System that enhances battlefield awareness, planning, and target identification.
“We believe this could be a good first step to sparking more adoption across the European continent,” Giarelli adds.
As of pre-market hours on May 7, Palantir’s share is trading at US$109.19, a 9.19% upside to Morningstar’s fair value estimate.
