Palantir: the story is changing

A strategic revenue shift fueling the future of the stock

Expensive consultancy firm or the next AI compounder? The debate around Palantir stock continues.

Meanwhile, the stock has delivered an impressive 4x from the lows of nearly one year ago. What is Wall Street seeing? Is it hype? Is there room for further upside from here?

In today’s focus, we’ll try to get a better understanding of Palantir’s growth trajectory with the help of numbers. In particular, we’ll break down the company’s revenue story and project it 5 years out in light of the strategic transition the company is facing.

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Wait, what strategic change?

As you might or might not know, Palantir is switching from a government story to a commercial story.

In the last quarter, US commercial revenues grew 70% compared to Q4 2022, whereas US Gov. revenues increased only 5%. Governments account nowadays for 53% of total revenues, but the trend is rapidly evolving.

The core of today’s business case is simple: how far can Palantir go thanks to the explosive growth of its commercial segment?

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Business case: some assumpions

To keep things relatively simple, we will assume the following:

• Commercial revenues will significantly outpace government sales in terms of growth amid company strategic transition

• I maintain a 5-year time frame, as I find it almost impossible to look further beyond

• Palantir will be approaching earnings optimization in 2028. EBITDA will converge to a GAAP threshold of 35%

• Shares compensation and shares buyback programs balance each other out

Let’s dive into it!

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🐻 The Bear Case

Here’s a more conservative projection.

Actually, not that conservative if we project a 18% CAGR until 2028, a 35% EBITDA margin and a 25 EBITDA multiple. You get the idea: let’s stretch it to see if current valuations make sense.

Lots of data, I know! To simplify this is how it’s built:

1. Revenue growth broke down by segment, with US commercial deflating fast;

2. Valuation estimate: plotting a fair multiple to end-period EBITDA.

…and that’s still a 0% return from today!

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⚖️ The Base Case

What happens if we are a bit more optimistic on the US commercial growth, and if market sentiment on the stock stays high with a 30x EBITDA multiple? Here we go:

A 30% return in 5 years that would likely underperform the S&P500. But let’s be even more bullish.

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🐂 The Bull Case

Here we assume 50% constant growth rate year after year for US commercial sales. Too much? Probably, but let’s run the numbers:

With a more generous EBITDA multiple of 35, the stock could double. This is purely theoretical, of course.

Now, you may ask… Why do I plug a random 25 to 35 EBITDA multiple? Well, looking at more mature, earnings optimized in 2024, I observe the following:

The latter are all different companies, that’s true. But the multiple comparison still looks fair to me.

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Conclusion

What are your takeaways from today’s analysis?

1. Dive deep into how revenue segments transition when analyzing growth stories: that’s where the strategy is unveiled.

2. Always beware of how much Mr. Market is already incorporating in today’s valuations. For Palantir, they are high.

3. Palantir is a leading example of profitable growth. Yet the road to 100 billion dollar valuation doesn’t look like an overnight success. Alex Karp will have to execute at perfection to guarantee superior returns to new shareholders. Unless another crash occurs :)

If you have any questions on the business case, let me know with a direct message or via mail at businessinvestbi@gmail.com!

Enough brainwash for today.

Thank you so much for your valuable time,

Francesco - Business Invest