Got $1,000? Buy and Hold This Growth Stock

The stock market is one of the best ways to generate wealth over the long term. Since 2001, the Nasdaq 100 has surged 884%, growing at roughly 12% per year. Put another way, if you had invested $1,000 in the Nasdaq two decades ago, that sum would be worth nearly $10,000 today. And that includes the impact of the Great Recession, which cut the index down by 50% in 2008.

Of course, as a stock picker, my goal is to outperform the broader market. That's why I own Palantir Technologies (PLTR -0.23%). Here's why this growth stock looks like a smart long-term investment.

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The bull case

Palantir specializes in big data. Its Gotham platform was designed for government agencies, while its Foundry platform was built for the commercial sector. In both cases, Palantir's software helps enterprises integrate, analyze, and secure data, allowing clients to make informed decisions, simulate complex scenarios, and build AI-powered applications.

Why does this matter? Modern enterprises rely on a plethora of software and systems to manage day-to-day operations, including tools for customer relationships, enterprise resource planning, and supply chain management. And all of these technologies create troves of valuable data -- but that value is difficult to unlock when data is spread across siloed systems.

Palantir solves this problem. More importantly, the company provides granular access controls and monitoring tools, enabling clients to protect their data and govern its use. In that regard, Palantir's history with the U.S. intelligence community gives the company a significant edge, showing the security of its platform. That advantage has helped Palantir grow quickly.

Data source: Palantir SEC filings, Ycharts. TTM = trailing-12-months. CAGR = compound annual growth rates.

Despite this impressive growth, Palantir's top line actually accelerated in the most recent quarter, surging 49%. Moreover, the company is now free-cash-flow positive, meaning its operations are self-sustaining.

Also noteworthy, Palantir closed 62 deals worth at least $1 million during Q2, bringing its "total remaining deal value" to $3.4 billion, up 63% over the prior year. In other words, the value of existing contracts is growing more quickly than revenue, highlighting the potential for strong future growth.

A word of caution

Before throwing money at Palantir, investors should be aware of certain risk factors. First, the company is not yet profitable on a GAAP basis, and the stock trades at a very pricey 29 times sales. Not surprisingly, this has led to extraordinary volatility, and the share price currently sits 38% below its 52-week high.

Likewise, Palantir had just 169 customers as of Q2 2021, which puts the average revenue per customer at $7.9 million. That means the loss of even a few clients would be a significant headwind to its top line. Moreover, revenue from commercial clients grew just 28% during the most recent quarter, while government revenue surged 66%. If Palantir hopes to scale its business, its Foundry platform needs to gain traction in the commercial sector.

However, this situation may be improving, as commercial clients jumped 32% in Q2, and 61% in the first half of 2021. Likewise, commercial revenue in the U.S. skyrocketed 90% during the most recent quarter.

Here's the bottom line: In 2020, each person created 1.7 megabytes of data every single second, and 90% of the world's data was created in the last two years. In short, digital transformation is driving exponential growth in information; and in order to adapt, enterprises need to harness the power of that data and use it as an advantage. Palantir makes this possible.

As a result, the company puts its market opportunity at $119 billion, and management expects annualized revenue growth of at least 30% through 2025. If that trend plays out, I wouldn't be surprised to see this stock doubled or tripled during that time. That's why Palantir looks like a smart long-term investment.