Morgan Stanley sounds the alarm! Is Palantir, leading the way in AI applications, unable to rise?

AI data analysis company Palantir surged 380% last year, becoming a big winner in the U.S. stock market. However, Morgan Stanley sounded the alarm, downgrading Palantir's rating to "underweight," warning of valuation premiums and an imbalance between risk and return.

In a report on January 6, Morgan Stanley analyzed Palantir, providing a comprehensive breakdown from aspects such as product cycle, government and commercial business performance, operational efficiency, and valuation, giving it an "underweight" rating with a target price of $60 per share, indicating about a 25% downside from the current stock price. The enterprise value/sales ratio for the fiscal year 2026 is 32 times, with a growth-adjusted ratio of 12 times, reflecting a 100% premium over peers.

Morgan Stanley stated that Palantir has indeed achieved better-than-expected performance over the past 18 months, driven by its AI Platform (AIP) products and "Bootcamp" market strategy, with government business annual growth rising from 11% in 2023 to 27% in 2024, rapid growth in large government contracts, and a slowdown in operating expense growth contributing to a 900 basis point expansion in profit margins.

However, Morgan Stanley questions the sustainability of this growth momentum, believing that Palantir's technological advantage has reached or is nearing its peak at this stage, and that the growth prospects are already fully reflected in the stock price, with 13 key performance indicators (KPIs) declining quarter-over-quarter in the third quarter.

Doubts About the Sustainability of Strong Growth Momentum

Morgan Stanley's analysis pointed out that as enterprise customers enhance their own AI capabilities, Palantir's technological advantage may gradually weaken, thereby affecting its current growth momentum and the sustainability of its valuation premium.

1. At the current stage, Palantir's customer acquisition has reached or is nearing its peak: Palantir possesses leading technology in data integration, workflow orchestration, and business ontology mapping, and helps customers rapidly achieve AI production through a deployment engineer model. Part of the reason Palantir has become such an attractive partner is due to its relative gap in capabilities/human capital compared to end customers, which we believe has reached or is nearing its peak at this stage of the cycle, potentially making it difficult for Palantir to maintain its current growth momentum.

2. Growth prospects are attractive, but have been fully reflected in the stock price: The inflection point of growth and our positive revision of Palantir's positioning in the generative AI cycle have been well reflected in the stock price, which rose 340% in 2024, almost entirely driven by multiple expansions. Palantir's enterprise value/future 12-month sales multiple expanded by 292% in 2024. Due to a lack of visibility for significant estimate revisions, Palantir's trading price far exceeds the company's intrinsic value, which is insufficient to justify an upgrade in rating.

3. Out of 23 key performance indicators (KPIs), 13 declined quarter-over-quarter: Business momentum now seems to be stabilizing rather than further improving, with 13 key performance indicators (KPIs) declining quarter-over-quarter in the third quarter, after seeing the best growth rate improvement in the previous quarter.

Overall, Morgan Stanley expects revenue/free cash flow estimates and a 3.4 times enterprise value/2026 fiscal year free cash flow/growth multiple (88 times enterprise value/2026 fiscal year free cash flow) — a premium of about 80% over high-growth software peers, making it the second most expensive stock in the industry. This drives the target price to $60, implying an enterprise value/sales ratio of 32 times for the 2026 fiscal year, with a growth-adjusted ratio of 12 times, which is a 100% premium over peers, but still has 25% downside potential compared to the current trading price