Palantir Technologies(NASDAQ: PLTR) stock’s stunning surge of 372% in 2024 has made the stock extremely expensive, which explains why investors could also be wary of shopping for this high-flying artificial intelligence (AI) software specialist without delay.
Wall Street is expecting Palantir stock to dip in the approaching 12 months, as evident from the 12-month median price goal of $39, which points toward a 48% drop from current levels. In keeping with 22 analysts that cover Palantir, this median price goal suggests that the stock could have gotten ahead of itself, and that is not surprising if we take a have a look at its valuation multiples.
In spite of everything, a price-to-earnings ratio of 399 and a sales multiple of 72 tell us that investors may have to pay significantly wealthy multiples to purchase this AI stock. The tech-laden Nasdaq-100 index, then again, trades at 32 times earnings. Nevertheless, there are a few reasons that Palantir could also be price buying hand over fist despite its expensive valuation.
Palantir’s growth has accelerated in recent quarters due to the fast-growing demand for the corporate’s Artificial Intelligence Platform (AIP), which allows governments and organizations to integrate generative AI into their operations. It’s price noting that this platform was ranked as the highest AI/ML (machine learning) platform by market research firm Forrester last 12 months, ahead of well-established names corresponding to Microsoft, Amazon, and IBM, amongst others.
Nevertheless, this wasn’t the one time that Palantir has been ranked among the many top vendors of AI software platforms. In September 2024, Dresner Advisory Services gave Palantir the highest rating in usability and analytical features and functions in its AI, Data Science, and Machine Learning Market Study. Meanwhile, market research firm IDC ranked Palantir No. 1 within the AI software platform market back in 2021.
IDC points out that the AI software platforms market was price an estimated $14.2 billion in 2021, growing by almost 37% that 12 months. Palantir’s revenue in 2021 stood at $1.54 billion, growing 41% during that 12 months. Nevertheless, Palantir was getting the vast majority of its revenue in 2021 from selling software platforms and analytics solutions to government customers.
It has only been in recent quarters that its AI business has began taking off, which is obvious from the rapid growth in the corporate’s industrial customer base. For example, in 2021, Palantir’s industrial revenue jumped 34% to $645 million, in comparison with the 47% growth in government revenue, which was $897 million.
Coming to Palantir’s latest results for the third quarter of 2024, its industrial customer count jumped a powerful 51% 12 months over 12 months to 498. On condition that Palantir had a complete of 629 customers at the tip of the quarter, it will probably be assumed that the corporate finished the quarter with 131 government customers as in comparison with 123 in the identical quarter a 12 months ago.
This massive jump within the industrial customer base is a results of the rapid adoption of Palantir’s AIP, which has witnessed robust demand in recent quarters due to the corporate’s aggressive go-to-market strategy of conducting “boot camps.” Not surprisingly, Palantir now expects to report a minimum of 50% growth in its U.S. industrial business for 2024 to $687 million. That points toward a solid jump from the 36% growth in 2023 to $457 million.
This terrific uptake of Palantir’s AIP should allow it to stay one among the highest players within the AI software platforms market in the long term, and that ought to turn into a solid tailwind for the corporate. That is because the dimensions of the AI software platforms market is anticipated to hit $153 billion in 2028, as per IDC. On condition that Palantir is quickly increase an enormous base of economic customers, it should find a way to profit from this huge addressable opportunity and proceed to deliver stronger top and bottom-line growth in the approaching years.
Palantir’s earnings are growing at a faster pace than its revenue. Within the third quarter of 2024, the corporate’s adjusted earnings increased 43% 12 months over 12 months to $0.10 per share as in comparison with the 30% increase in revenue to $726 million. This faster growth in the underside line might be attributed to the corporate’s ability to first land a recent customer after which expand its business with those customers.
Palantir management provided just a few examples of this on the November earnings conference call:
To focus on just a few notable deal cycles: a big American equipment rental company expanded its work with us lower than eight months after converting to an enterprise agreement, increasing the account ARR 12-fold; a bottled water manufacturer, a specialty pharmaceutical company, and an agricultural software provider, all signed seven-figure ACV deals lower than two months after their initial boot camps.
It is a trend that is more likely to proceed due to the secular growth of the AI software platforms market and Palantir’s AIP offering, which is taken into account to be superior compared to peers. In consequence, Palantir should proceed to enjoy favorable unit economics as its land-and-expand strategy should allow it to generate more benefit from each customer.
The results of favorable unit economics are already visible on Palantir’s margin profile. The corporate reported an adjusted operating margin of 38% within the third quarter of 2024, up from 29% within the year-ago period. This figure could move higher in the long run and power Palantir’s earnings growth, provided that it has been adding recent industrial customers at a rapid pace of late, and people customers could strengthen their relationships with the corporate to deploy generative AI solutions.
That is why it will be prudent to look past Palantir’s valuation. The corporate is anticipated to deliver a 52% jump in earnings in 2024 to $0.38 per share. The estimates for 2025 and 2026 have moved significantly higher previously few months, a trend that might proceed, because the discussion above indicates.
As such, investors trying to add a growth stock to their portfolios would do well to take a look at the larger picture as an alternative of just the valuation because the multibillion-dollar opportunity in AI software platforms, Palantir’s robust position on this market, and the corporate’s efforts to profit from this space could help it remain a top AI stock in the long term.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Idiot’s board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Idiot has positions in and recommends Amazon, Microsoft, and Palantir Technologies. The Motley Idiot recommends International Business Machines and recommends the next options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Idiot has a disclosure policy.