Palantir Technologies (PLTR 0.60%) stock is down 30% from its record high, partly due to concerns about its valuation but also because some investors have rotated away from risky growth stocks in favor of safer assets amid economic uncertainty created by the Iran conflict.
Palantir has a long history of building software for the U.S. government, especially defense and intelligence agencies. In early April, President Trump gave the data analytics company a shoutout on social media, saying, “Palantir Technologies (PLTR) has proven to have great war fighting capabilities and equipment. Just ask our enemies.”
Beyond praise from the president, which accompanied reports that the U.S. military is using Palantir’s software to identify targets in Iran, investors recently got more good news about the company’s government business. Here are the important details.
Image source: The Motley Fool.
Palantir’s government businesss is expanding beyond defense and intelligence agencies
In February, the Department of Homeland Security (DHS) awarded Palantir a five-year BPA (blanket purchase agreement) worth up to $1 billion. The deal will let agencies like Customs and Border Protection (CBP) and Immigration and Customs Enforcement (ICE) quickly provision Palantir software and services without the traditional competitive bidding process.
Importantly, the contract could also expand Palantir’s reach into other DHS agencies, such as the U.S. Secret Service (USSS), Federal Emergency Management Administration (FEMA), Transportation Security Administration (TSA), and Cybersecurity and Infrastructure Security Agency (CISA), according to Wired.
In April, the U.S. Department of Agriculture (USDA) awarded Palantir a $300 million BPA to help the agency modernize service delivery to farmers and government field staff. Palantir will provide operational software that will “give USDA the visibility and speed needed to safeguard our food supply,” according to USDA CIO Sam Berry.
Additionally, Bloomberg recently reported that Palantir was one of three finalists competing for a Federal Aviation Administration (FAA) contract worth up to $32.5 billion. The company selected will design air traffic management software that will use artificial intelligence (AI) to predict problems and proactively adjust departure times to avoid potential incidents.
These deals are consequential for two reasons. First, they indicate Palantir’s government business (which accounts for more than half of total revenue) is still growing. Second, they demonstrate Palantir can win government business beyond its long-standing relationships with the Department of Defense and the intelligence community.
Most Wall Street analysts think Palantir stock is undervalued
Palantir says its unique software architecture gives it an edge in operationalizing AI. Whereas most analytics tools are built around charts and tables, Palantir’s platforms revolve around a complex decision-making framework called an ontology, which is more conducive to driving operational efficiency and productivity.
Morgan Stanley analyst Sanjit Singh sees Palantir emerging as one of the dominant platforms in enterprise software due to its ontology and use of forward-deployed engineers, which work directly with clients to develop custom software features. The company is well positioned to “maintain a competitive differentiated moat in this agentic AI super cycle,” he wrote in a recent note.
Palantir reported exceptional financial results in the fourth quarter. Revenue increased 70% to $1.4 billion, the 10th straight acceleration, and non-GAAP (generally accepted accounting principles) net income rose 79% to $0.25 per diluted share. Also, the company achieved a Rule of 40 score of 127%, which measures the sum of its revenue growth and adjusted operating margin. Values above 40% are viewed as healthy, but 127% is simply incredible.
Strong financial results prompted several analysts to raise their forward earnings estimates for Palantir over the next two years. The Wall Street consensus now says adjusted earnings will grow at 57% annually through 2027, according to LSEG. Even so, the current valuation of 195 times earnings is expensive.
Nevertheless, analysts generally think the stock is undervalued. Palantir currently has a median target price of $200 per share, which implies 37% upside from its share price of $146. I think investors can buy a small position today, provided they are comfortable with this knowledge: Despite strong execution, Palantir is a very expensive stock, meaning any bad news could cause shares to sink sharply.
