On Monday, Morgan Stanley (NYSE:MS) analysts downgraded Palantir Technologies Inc . (NASDAQ:PLTR) to an Underweight rating, accompanied by a new price target of $60.00. The firm's analysis indicates that although there has been a positive shift in growth and an improved assessment of Palantir's position in the generation of artificial intelligence (AI), the stock price has increased significantly, primarily due to an expansion in the multiple rather than fundamental growth.
Palantir's shares saw a substantial rise of 34% in 2024, which was largely attributed to a 292% increase in the 56x enterprise value/next twelve months (EV/NTM) Sales multiple. Despite the company's positive trajectory, Morgan Stanley points out a lack of material estimate revisions, suggesting that the stock is trading ahead of Palantir's intrinsic value, which does not warrant an upgrade in rating.
The analysts highlight several factors contributing to their outlook. First, the free cash flow (FCF) estimate revisions for calendar year 2025 increased by 41% in 2024, but this was mainly due to expense discipline rather than a significant rise in revenue, as the revenue estimates for CY25 only saw a 10% increase from the start of the year. Additionally, with management signaling an upcoming investment cycle, prospects for further financial expansion appear limited.
Second, the Commercial business, which is expected to be a major contributor to Palantir's AI narrative, has had a lesser impact on CY25 Revenue estimate revisions compared to the Government business. Furthermore, based on a discounted cash flow (DCF) analysis, Palantir's stock already reflects an approximate 30% 10-year compound annual growth rate (CAGR) and around 41% FCF margins, which would place CY35 FCF at $20.9 billion.
Comparatively, Palantir is trading well ahead of its high-growth software peers, at 111x EV/CY26 FCF and 4.5x growth-adjusted, which represents about a 14% premium, or 41.1x EV/CY26 Sales and 1.7x growth-adjusted, equating to roughly a 200% premium. Lastly, the business momentum appears to be stabilizing rather than increasing, as evidenced by a quarter-over-quarter decrease in 13 of 23 key performance indicators (KPIs) in Q3, following significant improvements in the previous quarter.
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