Palantir Technologies, Inc. (NYSE: PLTR) is a large data analytics software company that had a strong IPO in 2020. At its annual user conference — Palantir Forward 2023 — Palantir Technologies announced several new products and updates to its platform. These include industry-specific solutions for manufacturing, healthcare, and the public sector, as well as enhancements to the platform’s machine learning, data integration, and user interface capabilities. Palantir says its new industry-specific solutions will help organizations in these sectors optimize operational efficiency, reduce costs, and make better decisions. For example, Palantir Foundry for Manufacturing can help manufacturers improve operational efficiency and drive down costs, while Palantir Gotham for Cyber helps organizations to more quickly and effectively detect and respond to cyber threats. Alongside the new products, Palantir also also has several updates to its existing platform including new data connectors, more advanced machine learning features, and enhancements to the interface to make it easier to navigate and understand.
The stock has been volatile in recent months in the wake of the tech selloff. Palantir’s stock has three potential scenarios as to its business traction and stock performance out to 2030: the bullish, base, and bear case. Palantir has a market capitalization of $49.8 billion as of February 2024. Below are key financial metrics for the company:
| Metric | Value |
| Revenue (TTM) | $2.2 billion |
| Net Income (TTM) | $209 million |
| EPS (FY2023) | 0.33 |
| P/E Ratio | 262 |
Bull Case Scenario
Source: Bigc Studio / Shutterstock.com
In the bull case scenario, Palantir’s stock price will hit new highs by 2030 on continued strong growth. It reported 20% revenue growth and over 200% net income growth in Q4 2023.
If it manages to sustain 25%+ revenue growth per year for the next 5 years, that would put its revenue at north of $7 billion in 2030. With operating leverage kicking in, its net profit margins could expand from 15% today to over 25% by 2030. That would put its net income at nearly $2 billion for the year. Applying a market average forward P/E ratio of 25 would give a market capitalization of approximately $50 billion for Palantir in 2030.
Base Case Scenario
Source: Gorodenkoff / Shutterstock.com
Interest rates are not the end of the world for Palantir’s balance sheet. The company uses very little in the way of debt financing. Even at today’s yields, the company remains a robust generator of cash – with more than $3.6 billion in cash on the balance sheet. Interest rates shouldn’t be a significant concern as long as the company’s growth trends remain intact. And that means that interest rates probably won’t do much to the bull case for shares over the long run.
In this context, higher interest rates could be a modest drag on revenue growth. Even though Palantir does not use much debt financing, its clients rely on it. As rates rise, corporate and government IT spending may find some budgetary headwinds. However, the huge operating cash flow generation that Palantir enjoys at present should supply enough capital to allow the company to continue to expand as it has in the past. The company has plenty of liquidity to weather the storm should higher rates presage a slowdown.
Long-term, adoption of Palantir’s inventive data analytics platforms is likely to continue, in the core government defense and intelligence verticals, and in the breakout commercial applications that it has seen over the past two years – even if those applications see more moderate rates of growth than the hypergrowth through the pandemic lows that they have experienced to date. It may not be a picture-perfectly bullish outlook for Palantir, but there’s a strong case that the company could continue to deliver 10-15% annual revenue growth on average, with apposite trending in profitability metrics as adoption of the Gotham, Foundry, and Apollo software platforms continues to broaden. Such a scenario would likely be consistent with a stock that remains rangebound near current levels through the end of the decade.
Bear Case Scenario
Source: Chris Hondros / Hulton Archive via Getty Images
In a bear case scenario, Palantir’s growth trajectory may face steeper challenges over the coming years. Extended periods of high inflation and interest rates could dampen government spending on new software initiatives. Meanwhile, there could be a slowdown in the growth of Palantir’s commercial business due to enterprise IT budgets coming under pressure.
Accordingly, annual revenue growth could fall to a 10% range from now through 2030, versus the 20%+ projections. Profit margins could also go back toward 10% as the pace of adoption slows. In 2030, this could potentially leave Palantir with revenue of about $3.5 billion and a net income of around $350 million.
In addition, Palantir’s premium valuation could keep contracting in a slower growth environment. The forward P/E ratio could drop from over 250x today to 15-20x by the end of the decade. Applying a 20x multiple to the $350 million 2030 profit estimate would put the valuation at around $7 billion.
At the current $49.8 billion market capitalization, this estimate suggests Palantir’s stock could fall more than 80% from today’s prices to probably somewhere in the mid-single digits. Though the company would still be generating healthy free cash flow to keep the lights on, a protracted downturn in the macroeconomy as well as a loss of momentum across Palantir’s commercial and government end markets could severely dampen investor sentiment especially as the stock is priced for perfection at the moment.
While higher interest expenses could likely be a drag on profitability in a bear scenario, the company has fortuitously amassed a hefty liquidity position that it should be able to use to offset any cash flow pressures. A bigger risk will likely be demand growth going soft — from the commercial side customers trimming budgets as the business environment weakens, on the one hand, and public sector side, from slowing in defense spending.
While unlikely that growth would completely stall out, Palantir could see its secular growth story derailed in a bear case scenario – especially if economic weakness persists for an extended period over the next several years. This outlook would likely cause the premium valuation ascribed to the shares to contract dramatically, resulting in steep share price declines through 2030 versus current levels.
Final Thoughts
Source: Matthew Horwood / Getty Images News via Getty Images
Palantir Technologies operates in some intriguing areas that should see sustained long-term growth trends, including defense/security software applications and commercial data analytics platforms. Over the past 2 years, the company delivered triple-digit revenue and earnings growth. The bull case envisions that trajectory continuing mostly unabated for the next 5 years and beyond. However, risks remain that could result in more tempered growth. Extended high inflation and rising interest rates may hamper IT spending by both government and enterprise customers. And the current premium valuation embedded in the stock makes Palantir more vulnerable to the downside if the pace of expansion decelerates.
On balance, Palantir seems well positioned in expanding addressable markets that should fuel double-digit revenue and profit growth for years to come. But likely not at the spectacular triple-digit clips observed coming off the 2020 pandemic lows. A base case of approximately 15-20% annual growth continuing through 2030 appears more realistic. In that scenario, today’s stock price of around $24 per share seems to adequately reflect inherent risks and future growth prospects. Significant multiple expansion seems improbable given slower growth and rising rates. Thus investors considering Palantir at current levels must weigh its promising long-term outlook with risks related to decelerating momentum and rich valuation headwinds in the nearer-term horizon.
About the Author: Amit Nar is open to having casual conversations about stocks on X @alphaintelligence or by joining The Market Institution discord group.
Smart Investors Are Quietly Loading Up on These “Dividend Legends” (Sponsored)
If you want your portfolio to pay you cash like clockwork, it’s time to stop blindly following conventional wisdom like relying on Dividend Aristocrats. There’s a better option, and we want to show you. We’re offering a brand-new report on 2 stocks we believe offer the rare combination of a high dividend yield and significant stock appreciation upside. If you’re tired of feeling one step behind in this market, this free report is a must-read for you.
Click here to download your FREE copy of “2 Dividend Legends to Hold Forever” and start improving your portfolio today.
Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.
Editors' Picks
