Palantir Technologies(NASDAQ: PLTR) the stock’s stunning 372% rise in 2024 has made the stock extremely expensive, which explains why investors may be wary of buying this top artificial intelligence (AI) software specialist right now.
Wall Street expects Palantir stock to decline in the coming year, as evidenced by its 12-month median price target of $39, indicating a 48% downside from current levels. According to the 22 analysts who cover Palantir, this mean price target suggests that the stock may have gotten ahead of itself, and that’s not surprising when we look at the multiples.
After all, a price-earnings ratio of 399 and sales multiple of 72 tells us that investors will have to pay significantly rich multiples to buy this AI stock. Loaded with technology Nasdaq-100 the index, on the other hand, trades at 32 times earnings. However, there are several reasons why Palantir might be worth buying regardless of its price tag.
Palantir’s growth has accelerated in recent quarters thanks to rapidly growing demand for its artificial intelligence platform (AIP), which enables governments and organizations to integrate generative artificial intelligence into their operations. It is worth noting that last year this platform was ranked as the best AI/ML (machine learning) platform by the market research company Forrester, ahead of well-established names such as Microsoft, Amazonand IBMamong other things.
However, this was not the only time that Palantir was ranked among the top vendors of AI software platforms. In September 2024, Dresner Advisory Services gave Palantir the best rating for usability and analytics features and functions in its study of the artificial intelligence, data science and machine learning market. Meanwhile, market research firm IDC has ranked Palantir as #1 in the artificial intelligence software platform market as early as 2021.
IDC points out that the artificial intelligence software platform market was worth an estimated $14.2 billion in 2021, growing by nearly 37% that year. Palantir’s 2021 revenue was $1.54 billion, up 41% over that year. However, Palantir generated most of its revenue in 2021 from the sale of software platforms and analytical solutions to government users.
The AI business has only taken off in recent quarters, as evidenced by the rapid growth of the company’s commercial user base. For example, in 2021, Palantir’s commercial revenue jumped 34% to $645 million, compared to 47% growth in government revenue, which was $897 million.
Coming to Palantir’s latest Q3 2024 results, its number of commercial customers jumped an impressive 51% year-over-year to 498. Given that Palantir had a total of 629 customers at the end of the quarter, it can be assumed that the company ended the quarter with 131 government buyers compared to 123 in the same quarter a year ago.
This big jump in the commercial customer base is a result of rapid adoption of Palantir’s AIP, which has witnessed strong demand in recent quarters thanks to the company’s aggressive market entry strategy running “training camps”. Not surprisingly, Palantir now expects to report at least 50% growth in its US commercial business in 2024 to $687 million. This indicates a solid jump from 36% growth in 2023 to $457 million.
This great reception of Palantir’s AIP should allow it to remain one of the leading players in the AI software platform market for the long term, and this should prove to be a solid tailwind for the company. That’s because the AI software platform market size is expected to reach $153 billion in 2028, according to IDC. Given that Palantir is rapidly building a large base of commercial clients, it should be able to make the most of this large addressable opportunity and continue to deliver stronger top- and bottom-line growth in the coming years.
Palantir’s earnings are growing at a faster pace than revenue. In the third quarter of 2024, the company’s adjusted earnings rose 43% year-over-year to $0.10 per share compared with a 30% increase in revenue to $726 million. This faster bottom line growth can be attributed to the company’s ability to first find new customers and then expand its business with those customers.
Palantir management provided several examples of this at the November earnings call:
To highlight a few significant deal cycles: a major US equipment rental company expanded its work with us less than eight months after moving to a business contract, increasing the account’s ARR 12x; a bottled water manufacturer, a specialty pharmaceutical company and an agricultural software supplier all signed seven-figure contracts with ACV less than two months after the initial boot camps.
This is a trend that is likely to continue thanks to the secular growth of the AI software platform market and the Palantir AIP offering, which is considered superior compared to its competitors. As a result, Palantir should continue to enjoy favorable unit economics as its land and expansion strategy should allow it to generate more profit from each customer.
The effects of favorable unit economics are already visible in the Palantir margin profile. The company reported an adjusted operating margin of 38% in the third quarter of 2024, up from 29% in the year-ago period. That figure could increase in the future and boost Palantir’s earnings growth, given that it has been rapidly adding new commercial customers recently, and those customers could strengthen their relationships with the company to implement generative AI solutions.
That’s why it would be wise to look beyond Palantir’s valuation. The company is expected to post a 52% jump in earnings in 2024 to $0.38 per share. Estimates for 2025 and 2026 have risen significantly over the past few months, a trend that could continue, as the discussion above shows.
As such, investors looking to add growth stocks to their portfolios would do well to look at the bigger picture rather than just valuations such as the multi-billion dollar opportunity in AI software platforms, Palantir’s strong position in this market and the company’s efforts to make the most of this space it could help it remain the top AI stock in the long run.
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