The U.S. Army has chosen Palantir Technologies (PLTR 3.73%) to build its next-generation targeting system, and the choice is causing Palantir shares to rocket higher. Shares of the government tech company jumped as much as 10% at the open, before falling back to up 4% as of 10:30 a.m. ET.
A big win for an emerging defense powerhouse
Palantir began as a government IT company, famously helping the Pentagon track down Osama bin Laden. In recent years, since the company's initial public offering, Palantir has been attempting to build out its commercial offering. However, government deals still make up more than half of revenue and are a big part of this story.
On Tuesday, Palantir announced that the Army has awarded it a $178.4 million contract for the development and delivery of the Tactical Intelligence Targeting Access Node (TITAN) ground station system. The deal involves Palantir building and delivering 10 TITAN ground stations, which are designed to use data collected by sensors to pinpoint targets.
"This award demonstrates the Army's leadership in acquiring and fielding the emerging technologies needed to bolster U.S. defense in this era of software-defined warfare," Akash Jain, head of Palantir's government arm, said in a statement. "Building on Palantir's years of experience bringing AI-enabled capabilities to warfighters, Palantir is now proud to deliver the Army's first AI-defined vehicle."
The award follows a three-year bake-off that put Palantir up against RTX. Palantir has about a half-dozen subcontractors that will share in the revenue, including Northrop Grumman and L3 Harris.
Is Palantir a buy after its big Army deal?
The deal is great news for Palantir the company, but Palantir the stock appears to be getting ahead of itself. At its high Tuesday, the market had added about $4 billion in market capitalization to Palantir based on $178 million in future revenue.
To be fair, the total award is likely to be much more than $178 million in revenue. If the first 10 TITAN prototypes perform to spec, the Army is likely to buy another 100 to 150 systems -- enough to generate substantial additional revenue, even if the government is able to negotiate lower per-item payments on future orders.
The deal also solidifies Palantir's standing as an emerging defense contractor, which is good news for the company but also raises questions about valuation. Government contractors rarely grow at elevated rates or generate the outsize margins that investors have baked into this stock.
Palantir today trades at an enterprise value 56 times expected 2024 earnings before interest, taxes, depreciation, and amortization (EBITDA), well above the 14x multiple of TITAN partners Northrop Grumman and L3 Harris. Even compared to a more software-focused government contractor, Palantir's valuation looks like an outlier, with Booz Allen Hamilton currently trading at about 19 times expected EBITDA. Those comparisons likely caused the share pullback after the initial spike higher.
Existing investors should be heartened by the TITAN deal, knowing that Palantir has taken a major step toward solidifying its reputation as a prime Pentagon vendor. But those considering buying in on the news need to at least be aware of the valuation and the questions about whether it is sustainable, even as the defense side of the business continues to grow.
