Palantir's AI-Driven Growth and Valuation Concerns: A 10-Year Outlook

Where Will Palantir Be in 10 Years? | The Motley Fool

It has been all sunshine and rainbows for Palantir Technologies (PLTR 1.96%) shareholders as of late. The stock is up 168% in the last 12 months and is reaching all-time highs. Investors are excited about the company's foray into artificial intelligence (AI) analytics, soaring revenue, and expanding profit margins. It is one of the best-performing stocks in recent memory and was just added to the S&P 500 index. Management has an ambitious road map and has followed it brilliantly so far. Where will Palantir stock be 10 years from now? Let's investigate further. The beginnings of Palantir were with the military and intelligence services of the United States. The company's idea was to build better analytics software to help these agencies and the Department of Defense achieve their various tasks with 21st century tools. It ended up being a smart bet, with Palantir now the go-to provider for analytics and artificial intelligence (AI) software for U.S. government agencies. These agencies have large budgets. For example, Palantir was just awarded a five-year $480 million contract from the Department of Defense's office for AI deployment. The goal of the contract is to embed the company's AI operating system across the entire department, making it an integral part of the lives of the thousands of people working for and serving in the U.S. armed forces. Palantir still operates extensively with the U.S. government, but it since expanded to sign big businesses to its enterprise software tools. By pitching the fact that the top intelligence services use its software, the company made fantastic inroads with U.S. commercial customers. In the last three years alone, it grew its commercial customer count by a multiple of nine. As spending in these long-term deals expand, this should lead to more revenue growth in the next 10 years. When it went public at the end of 2020, Palantir had impressive revenue growth. That has continued up through today. Since going public, revenue is up 175% and hit $2.48 billion over the past 12 months. Last quarter, revenue grew 27% year over year. One concern investors initially had with the company was its lack of profitability. The operating margin was close to negative 100% when it went public, driven by a lot of up-front spending and stock options. Palantir made a miraculous turnaround in how efficiently it is run. Its operating margin was 12% over the last 12 months even as the business keeps reinvesting to expand its customer count and improve its services. This led to $292 million in operating income, a record, in the recent trailing year. Palantir's business is firing on all cylinders and shows no signs of slowing down. Customer count keeps growing, which should lead to even more revenue. This has investors extremely optimistic, sending shares to an all-time high of $40 in recent weeks. That $40 figure is where Palantir briefly traded during the bubble of 2021. Shares don't look any cheaper today. Let's take two easy valuation metrics as an example: the price-to-sales ratio (P/S) and the price-to-earnings ratio (P/E). Palantir has a P/S of 37 and a P/E of 229. The S&P 500 has an average P/E of 29, for reference. Expectations are high for Palantir, almost too high versus what the business could do in the future. For example, let's say that revenue goes from $2.49 billion to $20 billion 10 years from now and profit margins expand to 30%. That would be phenomenal performance for any business; few companies grow revenue at a double-digit rate indefinitely. Even in this scenario, Palantir would be generating just $6 billion in annual earnings for a P/E of 14.3 in 10 years versus its current market cap of $86 billion. This is cheaper than the S&P 500 index today but not far off its long-term average. Taking all these factors together, I think it is unlikely that shares will be higher in 10 years. I would expect them to be flat or lower even if the business keeps growing quickly. Valuation matters, and Palantir is trading at an overextended one at the moment.

Meet the Newest Artificial Intelligence (AI) Stock in the S&P 500. Buy It Before It Soars 170%, According to a Wall Street Analyst | The Motley Fool

Artificial intelligence (AI) stock Palantir was recently added to the S&P 500 index. The S&P 500 (^GSPC -0.17%) is widely regarded as the best barometer for the overall U.S. stock market. The index tracks 500 domestic companies that meet specific inclusion requirements concerning market value, profitability, and liquidity. Last month, S&P Global announced that Palantir Technologies (PLTR 4.67%) would be added to the S&P 500 on Sep. 23. Dan Ives at Wedbush Securities called it a "validation moment for the Palantir story." Shares have advanced 22% since the annoucement, but one analyst still sees huge upside on the horizon. Hilary Kramer, portfolio manager at Greentech Research, recently told Fox Business that Palantir could be a $100 stock in the future. While she did not discuss a specific timeline, her forecast implies 170% upside from the current share price of $37. Here's what investors should know. Palantir's primary platforms, Foundry and Gotham, let businesses capture data, develop machine learning (ML) models, and integrate those assets into an ontology. The ontology defines the relationships between digital information and real-world counterparts. Users can interact with the ontology through analytical applications to improve decision-making. Palantir says its ontology layer is a "key differentiator." In 2023, Palantir launched its Artificial Intelligence Platform (AIP), adding support for large language models and generative AI to Foundry and Gotham. Experts have praised the product. In August, Forrester Research recognized Palantir as a leader in AI/ML platforms, highlighting strengths in data ingestion and preparation, and intuitive user interfaces and automation. "Palantir is quietly becoming one of the largest players in this market," analysts wrote. The bodes well for Palantir and its shareholders. The International Data Corp. (IDC) expects AI platform sales to increase at 51% annually through 2028. Palantir delivered a strong performance in the second quarter, beating estimates on the top and bottom lines. Revenue increased 27% to $678 million and non-GAAP net income soared 80% to $0.09 per diluted share. CEO Alex Karp said, "The steady ascent of our profit reflects the unbridled demand for and understanding of the capabilities of our software." Management also raised full-year guidance, such that revenue is now forecasted to increase 23% in 2024. Karp also commented on AIP in his shareholder letter. "Our flagship artificial intelligence platform (AIP) was launch just over a year ago. And it has already transformed our business," he wrote. "Our growth across the commercial and government markets has been driven by an unrelenting wave of demand from customers for artificial intelligence systems that go beyond the merely performative and academic." Palantir has continued make headlines since the quarter ended. In September, it extended its relationship with longtime customer BP; the oil and gas company will deploy AIP to improve operational efficiency. Additionally, Bloomberg reported that the U.S. government awarded Palantir a $100 million contract that will makes its AI targeting tools available to more military personnel. Palantir is an interesting company with a strong presence in a quickly growing industry, but its valuation is in the stratosphere. Wall Street expects Palantir's adjusted earnings to increase at 22% annually through 2025. Meanwhile, the stock trades at 115 times adjusted earnings. Those figures give a PEG ratio above 5. For context, PEG ratios of 1 or 2 are generally seen as reasonable. That means Palantir's stock is outrageously expensive at its current price. Not surprisingly, Wall Street analysts are generally bearish on the company. The stock's median price target of $27 per share implies 27% downside from its current share price of $37. Barring an extreme acceleration in earnings growth, I doubt Palantir will come anywhere close to $100 per share in the near future. And I would personally avoid this stock until the valuation falls back to Earth. There are plenty of other stocks poised to benefit from the AI boom that trade at more reasonable prices.

Is Palantir Stock a Buy? | The Motley Fool

Palantir Technologies (PLTR -0.70%) has been one of the market's hottest stocks this year, with its price more than doubling. However, it is also one of the more divisive names in the market, largely due to its valuation. Let's take a look at both the bull and bear cases with Palantir to help determine whether the stock is a buy at current levels. Palantir has established itself as one of the top data gathering and analytics companies in the world. The U.S. government has used the company's technology for such mission critical tasks as fighting terrorism and tracking the spread of COVID-19. As a result, the company's resume is undeniable. More recently, the company has created an artificial intelligence platform (called AIP) that is expanding its use cases and making the company's services more desirable to commercial clients. AIP lets users build AI apps, actions, and agents in a workflow builder to help solve complex problems across industries. The new offering has been resonating with commercial clients, as seen in its recent results. Its commercial segment revenue jumped 33% year over year in the second quarter to $307 million, while its U.S. commercial revenue surged 55% to $159 million. The company is implementing a go-to-market strategy of using boot camps to attract new customers to its AIP offering. Through these boot camps, Palantir provides training and onboarding to demonstrate to customers how they can use AIP. This is helping greatly increase the company's customer count, with U.S. commercial customers surging 83% year over year and 13% sequentially to 295 customers. The company sees its next big growth driver as taking these new customer wins and moving them from prototype work into production. This is a classic land-and-expand strategy and it is still in its early days. The company showed solid net dollar retention of 114% last quarter. This is a metric that measures growth of existing customers after any churn over the past year. However, Palantir noted that this metric does not take into account the momentum it is seeing in customers acquired in the past 12 months. At the same time, revenue growth from its largest client, the U.S. government, is starting to reaccelerate after a lull. In its most recent quarter, U.S. government revenue climbed to 23%, up from 14% overall government growth in 2023. The company has also announced a number of government contract wins this year, including a five-year nearly $100 million deal to expand its Maven Smart System access across the military and an initial $153 million production contract to make licenses of its AI-enabled operating system available across the Department of Defense. Palantir also recently announced it is teaming up with Microsoft to deploy its services over Microsoft's government and classified cloud environments to try to speed up the process of implementing AIP offerings within the government vertical. Altogether, Palantir appears to have a lot of growth opportunities in front of it. The bear case for Palantir largely stems from its valuation, as the fervor around the stock has driven it to lofty valuations, with the stock trading at a forward price-to-sales (P/S) multiple of 30 based on current-year analyst estimates. That type of P/S multiple just does not match with the 27% revenue growth the company saw last quarter or the 17% revenue growth it generated in 2023. Prior to the pandemic, high-gross-margin software-as-a-service (SaaS) companies with growth generally between 25% to 35% would typically trade at an enterprise value-to-revenue ratio of under 10. Palantir is currently trading at a 29 multiple based on current-year analyst estimates for revenue of $2.76 billion and 24 times 2025 analyst revenue estimates of $3.32 billion. That's not just a little overvalued, that is an extraordinary valuation given its current growth rate. While a huge acceleration in growth could help justify its valuation, it is worth remembering that it appears Palantir's government business growth can be a bit lumpy. Analysts, meanwhile, are only projecting about 20% revenue growth in 2025. At the same time, insiders have also been looking to dump Palantir shares. The company's chairman, Peter Thiel, recently adopted a Rule 10b5-1 plan to sell nearly 28.6 million Palantir shares by the end of 2025. Meanwhile, Palantir CEO Alex Karp exercised and sold 9 million shares of options at an exercise price of $11.38 that were not set to expire until 2032 through a Rule 10b5-1 plan. It was a big increase from the 575,000 shares he sold as part of the plan in August, indicating there may have been a pre-set trigger price to accelerate his selling. Meanwhile, other executives including its CFO, and multiple directors have also been selling shares. While Palantir the company has a bright future ahead, price still matters and Palantir's stock is trading at extreme levels. As such, I'd follow the lead of the company's top executives and be a seller of the stock, not a buyer.

Is This New S&P 500 Stock a Sell After Soaring 161%?

It has been a year to remember for shareholders of data analytics and artificial intelligence (AI) software company Palantir Technologies (PLTR -0.70%). The stock has surged by more than 160% over the past year, and the committee that picks which companies merit membership in the S&P 500 added it to the benchmark large-cap index this month. Index inclusion is a badge of honor that acknowledges a company's strong performance and raises awareness of it among investors. Palantir's products, especially its AIP platform, are driving accelerating revenue growth and strong profitability. However, the share price has grown faster than the underlying business. Should shareholders consider selling while they're ahead, or does Palantir have more room to run? The stock has outrun the business I'm not here to pick on Palantir's business. There is a lot to be excited about. The company has emerged as arguably the leading AI software play on Wall Street. It debuted the AIP platform last year as a tool for companies to develop and deploy bespoke AI applications, and its revenue growth has steadily accelerated since then. Technology advisory company Forrester Research recently recognized AIP as the market's top AI and machine learning platform. And yes, its inclusion into the S&P 500 has likely generated some buying momentum for the stock. Funds that track the S&P 500 must add Palantir shares to reflect the index, and many investors gravitate to S&P 500 companies because they must meet strict standards to get into the index. The problem is that the stock price gains have dramatically outrun the growth of the business. Palantir's trailing-12-month revenue has grown by a total of around 16%. The stock's appreciation has outpaced that by a factor of almost 10. In reality, stock prices at any given time are heavily reflective of the market's level of enthusiasm for that stock. Part of investing is recognizing when the market is too excited or pessimistic. Right now, the market's sentiment toward Palanir is borderline frenzied. Remember the "everything bubble" of 2020-2021, when zero-percent interest rates and loose-money fiscal policies put in place to keep the economy stable during the pandemic crisis fed into a speculative bubble across growth stocks, cryptocurrencies, and other assets? Though the broad market indexes are now setting new all-time highs again, many growth stocks still trade at fractions of the valuations they reached at the peak of that bubble. Analysts believe the company will generate $2.76 billion in revenue in 2024 and $3.32 billion in 2025. The stock trades at a forward P/S of 25 based on next year's revenue estimates. If the stock eventually settles down to a long-term P/S ratio somewhere in the middle of this wide range -- say, 15 times revenue -- its chart could go flat or decline for years while the business grows enough to catch up to the stock price. Should investors sell Palantir? Palantir's valuation has arguably entered bubble territory, and a number of factors could lead to that bubble bursting. There is political uncertainty as the U.S. election approaches. Geopolitical tensions are flaring in Europe and the Middle East. Now that U.S. inflation has largely been put back in check, the Federal Reserve has begun cutting interest rates, which should stimulate the economy. But when such stimulus is needed, it's sometimes because the country is heading toward a recession. Stock bubbles can also pop themselves. Remember, high valuations create high expectations. Palantir stock could keep rising until the company inevitably falls short of the impossibly high standards the market has baked into the share price. Once this happens, the resulting correction could be fierce. In other words, stock bubbles are like a game of musical chairs. They always end eventually. For investors, selling winners while they are still winning is difficult, and anyone who bought Palantir as recently as within the past few months is likely sitting on fantastic gains and feeling good. But selling some shares to lock in your gains might be wise. Otherwise, you may regret it when the music stops.