Palantir’s Second Quarter Reignites the Growth Thesis, but High Costs and Customer Expansion Concerns Limit a Rating Upgrade

Overview

This report reviews Palantir’s 2Q26 results. The company delivered strong revenue, bookings, and operating margin performance, with revenue growth accelerating sequentially by quarter for three consecutive years. Morgan Stanley raised its 2026 revenue, margin, and subsequent free cash flow forecasts, and believes AI-native competition has not yet weakened Palantir’s growth in the near term. However, slowing customer count growth, high product pricing, and customers’ selective deployment of Foundry/AIP use cases mean analysts still need to validate the long-term expansion potential among existing customers, so the Equal-weight rating is maintained.

Core views

First, second-quarter results re-strengthened the bull thesis, with both commercial and government businesses accelerating and bookings data confirming that demand remains elevated. Second, the context and semantic-layer problems Palantir addresses have strong stickiness for mission-critical business processes, and high-paying customers currently do not plan to migrate existing or new use cases to AI-native alternative platforms. Third, as open-weight and open-source models expand enterprises’ model choices, Palantir’s capabilities in model routing, private evaluation, observability, cost control, and long-term memory may become incremental advantages. Fourth, pricing and total cost will still prompt customers to selectively deploy use cases across Palantir and platforms such as Databricks and Snowflake; combined with a relatively small customer base and slowing new customer growth, a rating upgrade still requires more evidence.

Analysis framework

The report combines operating metrics such as quarterly revenue, segment growth, bookings, remaining deal value, customer count, and margins to conduct sequential and year-over-year analysis, and adjusts 2026—2028 forecasts based on the company’s latest guidance. The valuation uses 2030 free cash flow per share, a free cash flow multiple, and discounting at a 13% weighted average cost of capital, while setting bull, base, and bear scenarios to test the target price range.

Methodology notes

• Operating AnalysisKey Operating Metrics Trend Analysis

  Assess growth quality and sustainability through revenue, bookings, customer, and margin metrics

  The report compares second-quarter and first-quarter revenue growth, U.S. commercial TCV bookings, remaining deal value, customer count, and operating margin, noting that 14 of 26 key metrics improved sequentially.

• Valuation AnalysisFree Cash Flow Multiple Valuation

  Multiply forward free cash flow per share by a valuation multiple and discount it to the target year

  The base-case price target uses 2030 free cash flow per share of $7.07, a 41x free cash flow multiple, and discounting at a 13% weighted average cost of capital, while including about $2.8 of net cash per share, resulting in a $205 price target.

• Scenario AnalysisBull—Base—Bear Scenarios

  Change customer growth, average revenue per customer, long-term revenue growth, margins, and valuation multiples to assess the price range

  The bull, base, and bear scenario price targets are $295, $205, and $81, respectively, with the key differences coming from customer expansion speed, average revenue per customer, 2030 free cash flow, and the applicable multiple.

• Competitive AnalysisCustomer Interviews and Substitution Risk Assessment

  Assess platform stickiness, willingness to switch, and price sensitivity through feedback from high-paying customers

  Interviewed customers spending more than $5 million annually did not indicate plans to migrate existing or new use cases to AI-native alternatives, but multiple customers expressed concerns about Palantir’s pricing and overall costs.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• PALANTIR TECHNOLOGIES INC (PLTR.US)

  The U.S.-listed common stock directly covered by this report

  Strengths

  Revenue has accelerated for 12 consecutive quarters; U.S. commercial and government businesses are both growing strongly; operating margins and free cash flow are improving; the semantic layer for key business processes is sticky; trends in open-weight and open-source models may expand the platform’s value.

  Weaknesses

  The customer base is relatively small, and customer count growth is slowing; pricing and overall costs are high; some customers selectively deploy use cases between Foundry/AIP and other data platforms.

  Comparison

  Compared with AI-native applications or agent platforms, Palantir is more mature in context, semantic layer, model routing, private evaluation, and governance; compared with Databricks or Snowflake, its high cost may limit deployment of some workloads.

  Risks

  Large customer concentration leading to performance volatility, customer expansion falling short of expectations, weakening government spending, intensifying AI-native competition, slower margin improvement, and compression of high valuation multiples.

Key data

• Second-quarter revenue growthYoY +93%The first quarter was YoY +85%, marking the 12th consecutive quarter of acceleration.
• U.S. commercial revenue growthYoY +149%The first quarter was YoY +135%.
• U.S. government revenue growthYoY +90%The first quarter was YoY +84%.
• U.S. commercial TCV bookings growthYoY +153%The first quarter was YoY +45%, indicating a clear strengthening in bookings momentum.
• Second-quarter operating marginAbout 60%Up more than 1,300 basis points year over year; about 25% three years ago.
• FY26 revenue guidance$8,150 million—$8,158 millionCorresponds to about 82% revenue growth, with the midpoint raised by about 7% versus prior guidance.
• FY26 U.S. commercial revenue expectation$3,424 millionExpected to grow at least 134%, compared with the previous expectation of more than 120% growth.
• 3Q26 revenue guidance$2,160 million—$2,164 millionCorresponds to about 83% year-over-year growth; if the recent beat magnitude continues, growth could further rise to about 94%.
• 2026—2028 revenue growth forecasts82%／45%／40%The 2026 forecast was raised from 71%, while 2027 and 2028 remain unchanged.
• 2026—2028 operating margin forecasts60%／61%／62%Previously 58%／60%／62%, respectively.
• 2027—2028 free cash flow forecasts$7.1 billion／$10.1 billionPrevious forecasts were $6.7 billion／$9.6 billion.
• Price target and reference share price$205.00／$125.65The reference share price is the closing price on August 3, 2026, and the price target implies about 63.2% upside.
• Scenario price targetsBull $295／Base $205／Bear $81Corresponding respectively to 49x, 41x, and 20x 2030 free cash flow per share valuation multiples.

Impact & implications

Strong results and the significantly raised full-year guidance support continued upward revisions to near-term revenue and earnings expectations, and also weaken the short argument that AI-native platforms will rapidly replace Palantir. If open models accelerate enterprise adoption, Palantir may capture more demand through its semantic layer, governance, and model orchestration capabilities. However, the current investment thesis increasingly depends on sustained spending expansion among existing customers and the long-term maintenance of high margins; if pricing hinders use-case expansion, customer growth continues to slow, or valuation multiples contract, the share price could remain under pressure even with solid operating performance.

Risks

• Slowing customer count growth: total customer growth declined from 31% in the first quarter to 24%, while U.S. commercial customer growth fell from 42% to 35%.
• Product pricing and overall costs are relatively high, which may force customers to deploy only certain high-value applications on Foundry/AIP.
• Revenue depends on a small number of large contracts and customers, which may cause volatility in bookings and financial performance.
• Improvements in AI-native applications, agent platforms, or other data platforms may weaken Palantir’s differentiation.
• If government software spending slows, it may affect growth in the U.S. government business.
• If margin expansion stalls, it may reignite the debate over whether Palantir is more like a software company or a consulting company.
• Long-term valuation depends on relatively high free cash flow multiples and sustained high-speed growth; rising interest rates or declining risk appetite may lead to valuation compression.
• Morgan Stanley and its affiliates have shareholding, service, or potential investment banking relationships with Palantir; investors should evaluate research independence prudently in conjunction with the disclosures.

What to watch

• Whether actual 3Q26 revenue again exceeds guidance and pushes year-over-year growth close to or above second-quarter levels.
• Whether U.S. commercial TCV bookings and remaining deal value can continue to maintain triple-digit growth.
• Whether growth in total customer count and U.S. commercial customer count can stabilize, and whether new customer acquisition improves.
• Existing customer spending expansion, average revenue per customer, and use-case penetration beyond the top 20 customers.
• Customer feedback on pricing and total cost of ownership, as well as changes in workload allocation versus platforms such as Databricks and Snowflake.
• Whether the proliferation of open-weight and open-source models materially increases demand for Palantir’s model routing, evaluation, and governance capabilities.
• Whether FY26 operating margin can reach about 60% and continue to support upward revisions to 2027—2028 free cash flow.
• The pace of government spending and the contribution of the AIP product cycle to commercial business growth.