rewrite this title Palantir Reaches an Astronomical Valuation. What Next? – Nanalyze

The age of artificial intelligence is upon us. Upwards of 100,000 “AI companies” across the globe are having money thrown at them by investors who are afraid of missing out. That’s accompanied by a war for talent and scramble to invest in as much hardware as possible while NVIDIA (NVDA) reaps the rewards. As for retail investors, they face a cacophony of noise from clout-chasing pundits who latch on to whatever name is receiving the most attention and propel it even further. This has resulted in loads of AI pretenders that lack proper revenue growth but receive attention in spades from “me too” instant analysts.

Then you have companies that are showing strong revenue growth while also receiving lots of media attention due to controversial showboating CEOs who love basking in the media limelight. (PLTR) is one such name.

Palantir’s Valuation

Everyone is now “doing AI,” while we’ve been following this thesis long before it was fashionable. Some firms that have been doing AI for a while aren’t seeing the revenue growth we’d expect (UiPath, cough, cough) while others like ServiceNow (NOW) are pivoting hard into AI with revenue growth to show for it. Palantir has always been doing AI, but saw growth start to decelerate in 2022-2023 along with a declining net retention rate (NRR). Last year, growth resumed with an impressive 36% growth expected for 2025. Below you can see the recent acceleration in quarterly growth numbers.

Revenue growth is the only ground truth that proves a company is utilizing AI effectively and capturing market share. Palantir has such growth but unfortunately is perhaps the most popular stock out there for clout building (something the company’s CEO seems to encourage). Just look at how the valuation has soared over the past year when compared to another company doing enterprise AI, ServiceNow:

Whenever a company reaches an excessive valuation, one of two things will eventually happen. Fundamentals will eventually catch up, or the valuation will revert to the mean. This time is not different.

In Palantir’s case, let’s assume they continue to grow revenues at a 26% compound annual growth rate going forward (that’s based on their historical growth). Here’s how those revenues would look through 2032.

By 2031, they’ll enjoy the same simple valuation ratio as NVIDIA – around 24. Today, they’re priced to perfection with an SVR of 93. Strong continued growth is mandatory and should be monitored on a quarterly basis along with NRR.

Latching on to every press release they issue, hanging on every word of a CEO who thinks he’s engaged in some climactic battle of good vs evil, or paying attention to verbose pundits won’t help you navigate the hype. Set yourself a valuation target and stick with it. If you’re holding lots of paper gains, then you understand exactly why we despise cheerleaders. They create situations where long-term investors are tempted to exit their positions in the face of hype. And once you’re in that vicious market timing cycle you’re likely to underperform over time. You should be going into every investment with a set of rules that you follow to navigate such unexpected events.

One unexpected event that arose since we last checked in with Palantir was the emergence of the DOGE movement which promises to cut trillions of dollars in spending from the same U.S. government that Palantir has relied so heavily upon for their success thus far.

DOGE and the DOD

DOGE is said to be swinging the axe when it comes to government contracts and – because this has become very political – there is no source of ground truth as to what that entails. For Palantir, we can watch growth of their U.S. government segment along with net retention rate (the extent to which existing customers are spending more over time).

Back in the day, Palantir used to provide net retention rates across four dimensions – commercial and government across USA and international. Then they stopped making their net retention rate prominent when it dipped to 111% in late 2022. Now it’s back up to 124% – just above SaaS company average – which shows they’re successfully upselling existing clients.

Since the CEO likes to dabble in politics, there’s a risk that this firm could run afoul with the current or even future administrations. How can we gauge if they’re taking damage from DOGE’s minions?

Gross retention rate (basically cancels) isn’t provided so we just need to continue monitoring net retention rate. Perhaps any fat being trimmed will be offset by increased expenditures as a result of the war du jour, though Palantir isn’t using a consumption-based business model. Basically, we’re stuck watching overall revenue growth for the US government segment along with net retention rate. Here are US government revenues plotted over time.

We’ve always found it unacceptable for any company to be so heavily reliant on a single country’s government, especially the one they reside in. That’s because the government has all the power at the negotiating table and budgets are often subject to the whims of the current administration. In Palantir’s case we want commercial revenues to be a majority of total revenues – at least – to minimize this risk.

Commercial Revenue Growth

A heavy dependence on the U.S. government can only be reduced in two ways – either U.S. government revenues show declining growth over time, or all other revenue segments grow faster. Here are the latest revenue segmentations as of last quarter.

Although we’ve been hearing about growing pains in the European commercial segment, international revenues still account for nearly 30% of total revenues while U.S. government revenues have hit a new low of just 42% of total revenues. What would that number need to be for that risk to be acceptable?

If we’re going to argue that war is good for Palantir, then that implies softness when there isn’t war. This is where Palantir’s CEO likes to paint a picture of Palantir protecting western civilization, but it all comes down to decisions being made by fickle politicians. We’d argue that if Palantir is able to pass the DOGE gauntlet unscathed (NRR persists at current levels, U.S. government doesn’t see growth drop) then that means they successfully navigated (arguably) the most challenging administration they’re likely to come across. They’ve also been able to weather both the Democrats and Republicans even while making lots of political statements. Perhaps seeing commercial revenues move to a majority (currently at 45%) might be sufficient to invest in Palantir at the right price.

Would We Invest in Palantir?

Our investment methodology has been refined over decades and is a living document that changes as we continue learning. One of the biggest problems we’ve run into in the past is buying into hype by not setting an SVR cutoff that keeps us from overpaying. In all cases, we’ve been able to buy richly priced stocks we liked at a reasonable SVR provided we were willing to wait. No exceptions. That includes NVIDIA which we’ve held for nearly a decade while observing their SVR gravitate into the 30s but never to the levels Palantir is seeing. Our SVR cutoff is three times our catalog average which is roughly around 18 right now. Were Palantir valued at those levels then shares would be trading at $27. (And that number changes with every new quarterly revenue number.)

Let’s assume Palantir was trading at a valuation that was remotely close to the dozens of other disruptive companies out there also doing amazing things. What level of commercial sales would we need to see before being comfortable investing? What might create more comfort around the heavy USA government dependency? For starters, being able to pass the DOGE gauntlet would be a good indication that Palantir hasn’t a) pissed off the current administration too much and/or b) has deployed their solutions so that they can’t easily be displaced. Having spoken before about becoming “the operating system for U.S. government,” it’s also conceivable that Palantir could be used for use cases unique to the current administration such as deportation. The repercussions could range from a gentle scolding by CNN to clients canceling because Palantir does “bad things.”

For those sitting on the sidelines feeling FOMO, or those holding lots of paper gains because of all the hype, remember that volatility goes both ways. Few instant analysts parroting Palantir’s bull thesis understand anything about company-specific risk. These are Rumsfeld’s “unknown unknowns.” When stocks accelerate in valuation extremely fast, it can create difficult situations that your average retail investor isn’t equipped to manage. That’s why it’s critically important to take a rules-based approach to investing which needs to be established before you invest in any asset.

Conclusion

Last year we were waiting for the U.S. election dust to settle and to see if they could match the lofty growth expectations set by their valuation at the time. They did, but the valuation went much higher. That’s not sustainable because this time isn’t different. Palantir’s growth has resumed, but it’s now the most richly priced stock in our catalog by a mile. Surviving the gauntlet of DOGE without angering the populace is critical, and we’ll check back in a year to see how well they navigated the new administration’s attempt at reversing the U.S. debt trajectory.