Yes, You Read That Right. Palantir Just Won $10 Billion From the U.S. Army.

Key Points

• On July 31, the U.S. Army merged 75 smaller contracts into one big $10 billion award -- and handed it to Palantir.

• Spread over 10 years, the contract secures about $1 billion a year in revenue for the AI defense tech contractor.

• Palantir earns superior and growing profit margins on its revenue.

• 10 stocks we like better than Palantir Technologies ›

When you follow the U.S. Pentagon's daily digest of contract awards as regularly as I do, things sometimes tend to blend together. Don't get me wrong -- $1 billion here, $1 billion there, and it eventually becomes clear that the government is spending "real money" on military hardware. Still, most of the contracts described on the Pentagon's website tend to be much smaller in size -- $10 million here, a few tens of millions there.

All of which I tell you by way of illustrating that when all of a sudden, the U.S. Army announced last month that it's awarding a $10 billion contract to defense contracting upstart Palantir (NASDAQ: PLTR), that made me sit up and take notice.

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Image source: Getty Images.

Palantir's big payday

This contract, announced on July 31, is the biggest single award I've ever seen handed to Palantir, and almost 10 times bigger than the Maven Smart System contract it won from the U.S. Army in May.

And yet it's perhaps not quite as big as it seems.

As described on the Pentagon website, the $10 billion award "transition[s] existing contracts in which Palantir is currently a prime or subcontractor to [a new] enterprise agreement" worth $10 billion. This means the award doesn't really give Palantir $10 billion worth of new work to do for the Army. Rather, a substantial amount of the award (and perhaps even all of it), comprises dozens of existing contracts, already won by the defense company, now bundled up into one megasized $10 billion deal to provide artificial intelligence (AI) software and data services to the U.S. Army.

What's more, the $10 billion value is spread across 10 years. All of which is to say that Palantir's "$10 billion contract" is really worth only about $1 billion a year -- and much or all of that $1 billion was already destined for Palantir's wallet anyway.

How much is $1 billion worth?

Now, let's try to put these numbers in context for you.

One billion dollars may not be as big a number as $10 billion, but it's still pretty big. Palantir generated $3.4 billion in revenue over the past 12 months, according to data from S&P Global Market Intelligence. So a $1 billion Army contract amounts to about 29% of the revenue Palantir collected over the last 12 months -- a very big deal if this were additional incremental revenue added to the company's revenue stream.

It's less of a big deal, however, if all the Army is doing here is gluing together 75 smaller, existing contracts into one super-big agreement.

A second consideration is how valuable this revenue is to Palantir, which is to say, what kind of profit margin the company will earn on its $1 billion a year. The good news here is that Palantir's software-centric profit margins are robust, and getting even more so over time.

In 2023 for example, Palantir earned a 5.4% operating profit margin on its revenue. In 2024, that number doubled to 10.8%. This year, it's grown even more, to about 23.3%.

That's the good news. The better news is that the new $10 billion mega-contract "removes contract-related fees," according to the Army. And this logically implies that it's removing cost from the contract, potentially permitting Palantir's profit margin to expand even further.

Is Palantir stock a buy?

At least, Palantir investors had better hope this is the case. Palantir is generating giant revenue from the U.S. military; no one disputes that. Its revenue is also growing, roughly doubling in size since 2021, whether or not this particular $10 billion contract adds to that growth.

However, none of this changes the fact that Palantir is a frighteningly expensive stock, and that it absolutely must continue to both grow its revenue and expand its profit margin in order to justify its valuation.

Priced at an astounding 573 times trailing earnings, or an only slightly less alarming 255 times free cash flow, Palantir probably needs to be growing earnings somewhere in the low triple-digit percentage range to justify its current stock price -- yet according to S&P Global data, most analysts project no more than a 40% long-term earnings growth rate for the stock.

Sad as it is to say, even with a $10 billion Army contract in hand, Palantir stock costs too much to buy.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies and S&P Global. The Motley Fool has a disclosure policy.