Morgan Stanley On Palantir: “The Commercial Business — Where Most Of The AI Narrative Is Expected To Play Out — Has Contributed Less To CY25 Revenue Estimate Revisions Than The Government Business”

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Palantir (NYSE: PLTR), an AI-powered Software-as-a-Service (SaaS) provider that allows companies and government agencies to gather and analyze reams of data, is evincing a surprisingly consistent view on Wall Street these days, one that waxes lyrical about the company's core business strength but elicits substantial teeth gnashing on the stock's stratospheric valuation. Today, Morgan Stanley has chosen to expound on its views on Palantir, detailing critical insights in the process.

MORGAN STANLEY ASSUMES COVERAGE ON $PLTR WITH UNDERWEIGHT RATING, SETS PT AT $60

Analyst comments: "The inflection in growth and our positively revised assessment of Palantir's positioning in the Generative AI cycle is well reflected in shares, which were up +34% in 2024,…

— Wall St Engine (@wallstengine) January 6, 2025

To wit, Morgan Stanley analyst Sanjit Singh notes outright that Palantir is currently experiencing an "inflection in growth" and that the Wall Street titan is "looking for ways to become more constructive on [the company's] shares," albeit tempered by "the lack of visibility on material estimate revisions [that] leaves PLTR trading too far ahead of the company’s intrinsic value to justify a rating upgrade."

Singh then highlights three observations that show Palantir's growth inflection:

1. The free cash flow (FCF) estimate revisions for 2025 are up 41 percent, driven largely by "expense discipline" as revenue estimates for 2025 have only increased by 10 percent since the start of the year.
2. "Business momentum now appears to be stabilizing versus inflecting higher, with 13 of 23 KPIs down-ticking quarter-over-quarter in Q3, after showing the best rate-of-change improvements in the prior quarter."
3. "The Commercial business — where most of the AI narrative is expected to play out — has contributed less to CY25 Revenue estimate revisions than the Government business."

It is, of course, the third point that raises the most critical concerns about Palantir's ongoing bull run, especially as it shows that some of the company's most hyped partnerships, including one with BigBear.ai (BBAI) that adds its predictive capabilities to Palantir's product suite, has yet to see a material impact.

Of course, Morgan Stanley reserves its acutest concerns for Palantir's sky-high valuation, noting:

1. "[Palantir's shares] were up +34% in 2024, driven almost entirely by multiple expansion, with PLTR's 56x EV/NTM Sales multiple expanding +292% in 2024."
2. "On a DCF basis, the stock is already pricing in ~30% 10-year CAGR and ~41% FCF margins, which implies CY35 FCF of $20.9 billion."
3. "Palantir trades well ahead of High-Growth Software peers at 111x EV/CY26 FCF and 4.5x growth-adjusted (~14% premium) or 41.1x EV/CY26 Sales and 1.7x growth-adjusted (~200% premium)."

Morgan Stanley's concerns around Palantir's sky-high valuation echo those of Jefferies' analyst Brent Thill, who had noted back in November 2024:

"PLTR trades at 43x CY25 revenue, well over 2x the next highest software name."

Jim Cramer just said he is:

“Working on a Sunday brainstorm about buying Palantir $PLTR and Tesla $TSLA” pic.twitter.com/3lFANEt6ou

— Evan (@StockMKTNewz) January 5, 2025

As if Wall Street's growing valuation concerns were not enough, we note with trepidation that the dreaded Cramer curse is also now working against the high-flying stock.

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