What can we expect from Palantir this week? (PLTR)

An immersive deep dive on Palantir (PLTR), including DCF and IRR analysis. Its not pretty.

EasyTrader’s Deep Dive: Palantir Technologies Inc. (PLTR)

Company Overview

Palantir Technologies Inc. is a data analytics and software company founded in 2003, headquartered in Denver, Colorado. The company specializes in building software platforms that integrate and analyze large, complex datasets. Its flagship products, Palantir Gotham and Palantir Foundry, serve government and commercial clients, respectively. Gotham is widely used by government agencies for intelligence, counterterrorism, and military purposes, while Foundry targets enterprise clients seeking to leverage data for operational efficiency and decision-making. In recent years, Palantir has expanded its focus to artificial intelligence (AI), particularly with its Artificial Intelligence Platform (AIP), launched in 2023.

Palantir went public via a direct listing in September 2020 and joined the S&P 500 in September 2023. As of early 2025, its market capitalization is about $200 billion. At a market cap of $200 billion its P/E is a massive 430 (yikes, that’s after a huge recent drop), reflecting significant investor enthusiasm driven by its AI growth narrative. However, its high valuation has sparked debates about sustainability and profitability.

Industry and Market Context

Palantir operates in the rapidly growing fields of big data analytics and AI. The global AI market is projected to grow at a compound annual growth rate (CAGR) of over 35% through 2030, driven by demand for automation, predictive analytics, and generative AI solutions. Palantir’s dual focus on government and commercial sectors provides a diversified revenue base, though its heavy reliance on government contracts (historically over 50% of revenue) introduces risks tied to political and budgetary shifts, which we have seen with the significant price drop recently after an announced 8% military budget cut combined with the CEO selling some of his stock.

Competitors include traditional software giants like Microsoft and IBM, as well as specialized players like Snowflake and Databricks. Palantir differentiates itself through its end-to-end data integration platforms and its reputation for handling sensitive, mission-critical applications very well.

Financial Performance

Palantir has shown consistent revenue growth, improving profitability, and strong cash flow generation in recent years. Here are some key financial metrics based on its 2024 performance:

• Revenue: $2.86 billion (30% YoY growth from $2.15 billion in 2023).

• Net Income: $462 million (up from $210 million in 2023, reflecting a shift to profitability).

• Free Cash Flow (FCF): $1.1 billion (up from $750 million in 2023).

• Cash and Equivalents: $4 billion (providing liquidity for growth initiatives).

• Operating Margin: 16% (improved from 10% in 2023 due to scale and cost discipline).

The company’s customer base grew by 25% in 2024, with commercial revenue outpacing government revenue growth, signaling success in diversifying its portfolio. However, its price-to-earnings (P/E) ratio of 599 and price-to-sales (P/S) ratio of over 90 suggest a premium valuation compared to peers.

Investment Thesis

Palantir presents a compelling growth story fueled by:

• AI Leadership: The AIP has gained traction, with clients like the National Geospatial-Intelligence Agency and Mount Sinai showcasing its capabilities.

• Revenue Diversification: Expansion into the commercial sector reduces dependence on government contracts.

• Strong Balance Sheet: Significant cash reserves and positive FCF support R&D and market expansion.

However, risks include:

• High Valuation: The stock trades at a steep premium, leaving little margin of safety.

• Competition: Larger players with more resources could erode market share.

• Contract Dependency: Loss of key government contracts could impact revenue stability.

Discounted Cash Flow (DCF) Analysis

The DCF analysis estimates Palantir’s intrinsic value by projecting future free cash flows and discounting them to the present value. Below is a step-by-step breakdown:

Assumptions

• Forecast Period: 5 years (2025–2029), followed by a terminal value.

• Revenue Growth Rate:

  • 2025–2027: 25% CAGR (reflecting AI adoption and commercial growth).

  • 2028–2029: 15% CAGR (maturing growth as the company scales).

• FCF Margin: 35% of revenue (based on 2024’s $1 billion FCF on $2.8 billion revenue, with slight improvement expected).

• Discount Rate (WACC): 10% (reflecting Palantir’s cost of equity, given its minimal debt and a beta of 2.81, indicating high volatility).

• Terminal Growth Rate: 4% (aligned with long-term GDP growth plus modest AI sector outperformance).

Cash Flow Projections (in $ millions)

Year FCF (35%) PV (10%)

2025 1,225 1,114

2026 1,531 1,264

2027 1,914 1,437

2028 2,201 1,502

2029 2,531 1,571

• Present Value (PV) Calculation: Each year’s FCF is discounted using the formula PV = FCF / (1 + WACC)^n, where n is the year.

• Sum of PV (2025–2029): $6,888 million.

Terminal Value

• Terminal FCF (2029): $2,531 million.

• Terminal Value = FCF × (1 + Terminal Growth Rate) / (WACC – Terminal Growth Rate).

• Terminal Value = $2,531 × (1 + 0.04) / (0.10 – 0.04) = $43,861 million.

• PV of Terminal Value = $43,861 / (1 + 0.10)^5 = $27,231 million.

Total Enterprise Value

• Total PV = Sum of PV (2025–2029) + PV of Terminal Value = $6,888 + $27,231 = $34,119 million.

Equity Value and Per-Share Value

• Net Cash ( assumed no debt): $4,000 million.

• Equity Value = Enterprise Value + Net Cash = $34,119 + $4,000 = $38,119 million.

• Shares Outstanding: ~2.2 billion (based on recent data).

• Intrinsic Value per Share = $38,119 / 2,200 = $17.33.

Comparison to Market Price

As of March 2, 2025, Palantir’s stock price is approximately $85. The DCF-derived intrinsic value of $17.33 suggests the stock is ridiculously overvalued despite its recent immense price drop. This discrepancy highlights the market’s high growth expectations, causing extreme volatility when any negative news presents itself. This could be a good thing for day-traders, but for value investors like myself this spells trouble.

Internal Rate of Return (IRR) Analysis

The IRR calculates the rate at which the net present value (NPV) of cash flows equals zero, providing insight into the return an investor might expect by purchasing Palantir stock at its current price and holding it over a defined period.

Assumptions

• Initial Investment: $85 per share (current market price).

• Holding Period: 5 years (2025–2029).

• Future Cash Flows: Annual FCF per share, derived from the DCF projections, assumed distributed as dividends or reinvested (though Palantir does not currently pay dividends, this is a simplifying assumption).

• Exit Price: Based on the terminal value per share adjusted for growth.

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• FCF/Share: Total FCF ÷ Shares Outstanding (e.g., $1,225M / 2,200M = $0.56 for 2025).

• Exit Price: Terminal Value per Share = $43,861M / 2,200M = $19.94.

• Total Cash Flow (2029): FCF/Share + Exit Price = $1.15 + $19.94 = $21.09.

IRR Calculation

Using the cash flow series:

• Initial Outflow: -$85 (current stock price).

• Cash Flows: $0.56 (2025), $0.70 (2026), $0.87 (2027), $1.00 (2028), $21.09 (2029).

For this series, the IRR is approximately -2%. This negative IRR indicates that, at the current price of $85, the projected cash flows and exit value do not generate a positive return over five years, reinforcing the overvaluation conclusion from the DCF.

Sensitivity Analysis

Given the sensitivity of DCF and IRR to assumptions, I considered a range of scenarios:

• Bull Case: 30% revenue growth, 40% FCF margin, 8% WACC.

  • Intrinsic Value: $25.50/share.

  • IRR: 4% (still below typical equity return expectations).

• Bear Case: 20% revenue growth, 30% FCF margin, 12% WACC.

  • Intrinsic Value: $12.10/share.

  • IRR: -6%.

Even in the bull case, the stock appears extremely overvalued relative to its current price.

Conclusion and Recommendation

Palantir is a high-growth company with a lot of emotion behind it, yet it has a promising future in AI and data analytics. Its financials demonstrate improving profitability and strong cash flow, supported by a robust balance sheet. However, the DCF analysis suggests an intrinsic value of $17.33 per share, far below the current $85, indicating that even after its recent severe drop, it still has significant overvaluation. The negative IRR of -2% further suggests that buying at the current price may not yield attractive returns over five years under reasonable growth assumptions.

For value investors like myself, Palantir may warrant a “Hold” if already owned due to their emotional belief in the company, but a “Sell” or “Wait” for new entrants due to its inflated valuation. A price closer to $20–$30 could offer a better entry point, aligning with intrinsic value and providing a margin of safety. Long-term believers in Palantir’s AI vision may tolerate the premium, but I will not.