UBS comments on Palantir's earnings report: the company's "narrative is flawless," raising the target price to $165

UBS analyst Karl Keirstead pointed out after Palantir released its Q2 2025 financial report that the company's "narrative has no obvious flaws," raising the target price from $110 to $165.

He emphasized that Palantir has achieved accelerating revenue growth for the eighth consecutive quarter, with growth accelerating from 13% in Q2 2023 to 48% in this year's second quarter, and the revenue scale has reached an annualized level of $4 billion, a reversal that is "unprecedented."

However, Keirstead also noted that despite the company's strong performance and excellent growth and profit margins, valuation remains a major obstacle. He stated that based on his forecast for the fiscal year 2026, Palantir's current valuation reaches 136 times free cash flow, maintaining a "Neutral" rating on the stock.

Palantir's Performance Exceeds Expectations

Palantir delivered a financial report in the second quarter that comprehensively exceeded expectations, with total revenue reaching $1 billion, a year-on-year increase of 48%, far exceeding the market expectation of $939.3 million.

This marks the eighth consecutive quarter of revenue growth for the company, with annualized revenue levels surpassing $4 billion. Adjusted operating profit was $464.4 million, a year-on-year increase of 83%, with a profit margin rising to 46%, exceeding market expectations by 3 percentage points. Adjusted earnings per share were 16 cents, also surpassing the consensus estimate of 14 cents from analysts.

Both the commercial and government business segments showed strong growth, accounting for 45% and 55% of total revenue, with year-on-year growth rates of 47% and 49%, respectively. Among them, the U.S. commercial business grew the fastest, with quarterly revenue reaching $306 million, a year-on-year increase of 93%, and an annualized revenue scale of $1.2 billion.

Driven by the strong financial report, Palantir raised its full-year performance guidance, expecting revenue in 2025 to reach $4.14 billion to $4.15 billion, higher than the previous estimate of $3.89 billion to $3.9 billion, and significantly exceeding the market's general expectation of $3.91 billion. The full-year adjusted operating profit is expected to be between $1.91 billion and $1.92 billion, with adjusted free cash flow reaching $1.8 billion to $2 billion. The company also expects U.S. commercial business revenue to exceed $1.3 billion for the full year The outlook for the third quarter is also strong. Palantir expects revenue to be between $1.08 billion and $1.09 billion, significantly higher than the expected $985.4 million, with adjusted operating profit expected to be between $493 million and $497 million.

UBS Analyst: Flawless Narrative

UBS analyst Keirstead pointed out in the report that Palantir's growth is driven by three major trends: the explosion of demand for customized AI applications, increased investment in data infrastructure, and modernization of defense technology.

He emphasized that the growth momentum in both the government and commercial core businesses of the company is extremely strong: commercial business accounts for 45% of revenue, growing 47% year-on-year; government business accounts for 55% of revenue, growing 49% year-on-year, and has not been affected by delays in the U.S. federal contract cycle.

In particular, the U.S. commercial business saw quarterly revenue of $306 million, a year-on-year increase of 93%, with an annualized revenue scale reaching $1.2 billion. Keirstead mentioned that while this is not formal guidance, CEO Karp expressed hope for the business to achieve tenfold growth in the next five years, reaching an annualized revenue of $12 billion, which implies a compound annual growth rate of up to 58% over the next five years.

Keirstead believes that Palantir has raised its full-year revenue guidance by about $250 million (with a $66 million beat in the second quarter), expecting a full-year revenue growth rate of 45%, and without sacrificing non-GAAP profit margin targets, with adjusted operating profit margin increasing from the previous expectation of 42.8% to 46%. He pointed out,

“This financial report has almost no flaws, the only slight shortcoming is that international commercial business declined by 3% year-on-year.”

Therefore, he raised the revenue growth expectation for 2025 from 38% to 47%.

From an industry impact perspective, Keirstead noted that this financial report reinforces the market consensus that demand for customized AI applications and data modernization remains strong, benefiting data software peers such as Snowflake and Databricks. At the same time, the resilience of Palantir's U.S. government business does not apply to all SaaS companies with federal business.

He believes that the standout software companies this quarter are Microsoft and Palantir, which may enhance market confidence in continuing to invest in infrastructure, data, and AI-related stocks, rather than reverting to traditional subscription-based SaaS.

In terms of valuation, Keirstead stated that Palantir is valued at 136 times its free cash flow based on its fiscal year 2026. He extended the valuation model to fiscal year 2027, raising the target price to $165 (previously $110), based on a 105 times valuation of free cash flow for fiscal year 2027 (previously 120 times for fiscal year 2026), and called this a premium given Palantir's outstanding growth and profit performance.

Jefferies analysts added that despite the strong performance and growth trends, Palantir's valuation level is still "far from reality," even exceeding the most optimistic growth scenarios