Where Will Palantir Be in 5 Years?

Palantir (PLTR -0.28%) is a divisive stock. The bulls believe the data mining firm will continue to expand across the government and commercial sectors, while the bears believe it's too dependent on government contracts, its commercial business faces too many competitors, and its stock is too expensive. Palantir's volatility reflects that battle. It went public via a direct listing last September, started trading at $10 per share, surged to an all-time high of $45 in late January, and now trades in the mid $20s.

However, Palantir recently posted a strong second-quarter report and reiterated its guidance for annual revenue growth of more than 30% from 2021 to 2025. That rosy forecast suggests Palantir's revenue could rise from $1.1 billion in fiscal 2020 to over $4 billion in fiscal 2025. Let's see how Palantir intends to maintain that robust growth rate, and where its stock might be headed over the next five years.

Image source: Getty Images.

The secular growth of its core markets

Palantir's Gotham platform serves government clients, while its Foundry platform mainly serves commercial clients. Its cloud service Apollo provides constant software updates for both platforms.

Gotham and Foundry both gather large amounts of data from disparate sources, analyze those findings with artificial intelligence (AI) algorithms, then use the results to help organizations make data-driven decisions. They also secure organizations' data with cybersecurity services.

For example, Gotham helps the U.S. military gather intel to plan missions, while Foundry helps large companies like Airbus optimize their operations, cut costs, and develop new strategies. Therefore, Palantir should benefit from the secular expansion of the data analytics, AI, and cybersecurity markets.

The big data and business analytics market could grow at a CAGR of 10.9% between 2020 and 2027, according to Allied Market Research, while Facts & Factors expects the AI market to expand at a CAGR of 35.6% between 2021 and 2026. The cybersecurity market could also grow at a CAGR of 9.7% from 2021 to 2026, according to Markets and Markets.

Palantir's platforms bundle together services from all three expanding markets. It could also grow much faster than its industry peers in all three markets as it leverages its hardened reputation for managing military divisions and government agencies to secure more commercial clients.

More commercial spending, more government spending

Palantir served eight Fortune 100 companies, 12 Global 100 companies, and 24 Global 300 companies at the end of fiscal 2020. During the fourth-quarter conference call in February, COO Shyam Sankar said those low penetration rates represented an "immense and growing" opportunity for Palantir's commercial business. During the first-quarter conference call in May, Sankar said Palantir still only had a "handful of Fortune 500 customers" and accounted for "less than one-tenth of a percent of annual defense spending."

If we look back at Palantir's growth rates, we can see why the bulls are so excited. If Palantir can generate these kinds of growth rates while reaching only a fraction of its total addressable markets, it could grow significantly larger as those penetration rates rise.

Source: Palantir.

In the first half of 2021, Palantir signed new and expanded government contracts with the U.S. Army and the Air Force, as well as commercial contracts with big companies like Rio Tinto, PG&E, and BP.

Palantir also closed a growing number of larger deals. It closed 15 deals worth more than $5 million in the first quarter of 2021, but that number doubled to 30 deals in the second quarter. Its average revenue per top-20 customer increased 34% year-over-year to $39 million in the second quarter.

Those numbers suggest Palantir will grow faster than the analytics, AI, and cybersecurity markets, as well as less diversified enterprise-oriented peers like C3.ai (AI 1.67%), which generated just 17% sales growth last year as its core energy and industrial markets suffered slowdowns during the pandemic.

Palantir's stock could easily triple by 2025

Palantir isn't profitable on a GAAP basis yet, and its stock isn't cheap at over 30 times this year's sales. However, I believe it can maintain that high price-to-sales ratio if it achieves its goal of generating more than 30% annual sales growth through 2025.

If that happens, Palantir's stock could more than triple within the next five years. It could remain volatile for the foreseeable future, but its gradual expansion across the government and commercial sectors could generate big profits for patient investors.