Sticking With This Palantir Price Target Despite Changes

While we are seeing ample price target increases for Palantir (PLTR) shares on Tuesday morning, we are opting instead to reiterate our $220 target, and for now, our Two rating.

While we can see reasons to consider lifting our price target higher, the current market mood and capital raise environment for AI-related companies is likely to constrict valuations near term. Odds are that PLTR shares will be caught up in that even though its free cash flow generation remains considerable.

However, with the pullback in the shares, we are inclined to revisit our Two rating and potentially add to the Portfolio’s position when the shares settle out. Multi-year backlog levels that bring visibility as well as rising AI adoption and expanding usage, and Palantir’s net cash balance sheet and that aforementioned free cash flow, are all factors in that thinking. In our view, the concern over shorter initial Sovereign AI contract deal sizes with initial customers is offset by rising annual contract value sizes when customers move from piloting Palantir to production programs.

Looking at those multi-year figures gives us reason to favor a price-to-earnings growth rate valuation when examining PLTR shares, rather than a simple P/E ratio. When we do that, we first have to notice that between 2025 and 2028, the company is expected to deliver a compound annual growth rate of more than 70% for its bottom line. Examining that against consensus 2027 EPS implies a PEG ratio of 0.93.

And if drop 2025 and instead focus on 2026 to 2029, which removes the more than doubling in EPS expected this year, the EPS CAGR is still more than 48%. Measured against consensus 2027 EPS of near $2.55, implies a PEG ratio of 1.36-times. Our $220 target equates to a PEG ratio of 1.76 on that 2027 figure and, for those wondering, a PEG ratio of 2.0 implies a target closer to $245.

Should Palantir shares settle out near the $170 level we are seeing on Tuesday, we’re inclined to make a move.

The Quarter at a Glance

While the movement in the shares on Tuesday morning doesn’t show it, Palantir Technologies delivered the fastest growth in its history as a public company in the September quarter, with revenue up 96% year over year and 20% sequentially to $2.313 billion. Commercial revenue, government revenue and GAAP operating income each crossed $1 billion for the first time and revenue growth has now accelerated every quarter since Q3 2023. U.S. commercial revenue has grown by triple digits for five straight quarters, resulting in it surpassing U.S. government revenue for the first time.

In terms of how Palantir’s quarter stacked up against consensus expectations, the company delivered a beat and raise quarter. Adjusted EPS of $0.44 topped the $0.41 consensus and as we mentioned above, total revenue rose 95.9% to $2.31 billion, ahead of the $2.18 billion consensus and the company’s own Q3 guidance of $2.160 billion to $2.164 billion. U.S. commercial revenue of $984 million also beat the roughly $937 million analysts expected.

For the current quarter, Palantir guided total revenue to $2.649 billion to $2.653 billion, considerably above the $2.46 billion consensus, and with adjusted operating income guidance of $1.640 billion to $1.644 billion, also topping the $1.43 billion Wall Street estimate.

Once again, folks are trotting out the P/E valuation of the shares, but as we’ve explained more than a few times now and discussed above, given the company’s multi-year total U.S. commercial remaining deal value (RDV) of $6.517 billion exiting the September quarter and total RDV at $13.4 billion, we’re inclined to favor a price-to-earnings growth valuation metric.

At the same time, the continued step up in those RDV figures and rising customer counts suggest AI adoption is rising and usage expanding. During the earnings call, Palantir highlighted rapid pilot-to-production conversions during the quarter:

An industrial materials company converted a roughly $3 million pilot into a $29 million annual contract value (ACV) deal
A global athletic company converted a $1.6 million pilot into an approximately $21 million ACV deal
A global home appliance company went from a $1 million pilot to $3 million ACV, then expanded nearly fivefold to $15 million ACV in Q3
An apparel company converted a $2.5 million pilot into an $11.5 million ACV deal

In the customer count front, U.S. commercial customers rose 29% year over year and 5% sequentially to 686. Total commercial customers reached 904, up 22% year over year.

Now, let’s shift our focus to Palantir’s adjusted operating margin, which held at 62% compared to the prior quarter and compared to 51% in the year-ago one. That flat sequential comparison reflects the uptick in expenses, which rose 20% quarter over quarter due to AI platform investment and another wave of technical hires. But when we look at the company’s Rule of 40 score, revenue growth plus adjusted operating margin, rose to 158% from 155% in Q2, its 13th straight quarter of expansion.

Cash from operations was $1.205 billion and adjusted free cash flow was $1.216 billion, leaving the company $10.4 billion in cash and equivalents and no debt. That makes its balance sheet a stand out compared to others in AI space.

Looking Ahead

Palantir raised its outlook across the board, calling for current quarter revenue of $2.649 billion to $2.653 billion, implying about 88% year-over-year and 15% sequential growth at the midpoint. Management sees adjusted operating income of $1.640 billion to $1.644 billion, a roughly 62% margin, which signals the company is still investing.

For full-year 2026, revenue is now expected to come in between $8.530 billion and $8.534 billion, up 91% year over year and nine points above the growth rate implied by last quarter’s guide. U.S. commercial revenue guidance moves to more than $3.559 billion, growth of at least 143%, which implies at least $1.216 billion in Q4 U.S. commercial revenue, up about 140% year over year. Full-year adjusted 2026 operating income guidance rises to $5.245 billion to $5.249 billion and adjusted free cash flow for the year of $4.8 billion to $5.0 billion.

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At the time of publication, TheStreet Pro Portfolio was long PLTR.