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Will Palantir Be Worth More Than IBM by 2025?

By Leo Sun – Sep 28, 2021 at 7:52AM

Key Points

  • Palantir stock has generated big returns since its public debut last year.
  • IBM’s stock has stagnated over the past decade.
  • Palantir could become more valuable than IBM by 2025, but only if we factor in Big Blue’s upcoming spin-off plans.

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The high-growth data mining darling could eclipse Big Blue in four years.

Palantir (PLTR -1.05%) and IBM (IBM 0.03%) are two very different types of tech companies. Palantir's market value has tripled since its direct listing last September, thanks to the robust growth of its data mining and AI platforms. IBM, which went public 110 years ago, has lost about a fifth of its value over the past decade as it struggled to grow its legacy businesses.

Palantir is now worth $56 billion, while IBM is worth $123 billion. But could Palantir's market value soar and eclipse Big Blue's by 2025? Let's dive deeper into both companies' plans for the future to find out.

An IT services professional works on a server.

Image source: Getty images.

Palantir has set an ambitious growth target

Palantir's revenue rose 47% to $1.1 billion in 2020, and it expects its revenue to rise more than 30% annually from 2021 to 2025 -- which implies it will generate at least $4 billion in revenue in 2025.

Palantir's stock currently trades at 37 times this year's sales. If it maintains that premium price-to-sales ratio, it could be worth $148 billion by the beginning of 2025, and be more valuable than today's IBM.

Palantir expects that growth to be driven by the expansion of its two core platforms: Gotham, which serves government clients; and Foundry, which provides lighter versions of those services for enterprise clients. Its third platform, Apollo, provides cloud-based updates to both platforms. 

Palantir expects Gotham, which accumulates and analyzes intel from a wide range of disparate sources, to become the "default operating system for data across the U.S. government." Gotham already serves all branches of the U.S. military, the FBI, CIA, ICE, and other agencies, and it will likely gain even more contracts as the government upgrades its technological infrastructure.

Palantir's hardened reputation could also convince more enterprise customers to use Foundry to analyze their data and optimize their businesses. 

IBM's plans for the future are murkier

IBM's annual revenue declined from $99.9 billion in 2010 to $73.6 billion in 2020. Throughout that lost decade, IBM divested its weaker businesses and attempted to expand its cloud-oriented businesses.

Unfortunately, IBM couldn't offset the slower growth of its legacy hardware, software, and IT services businesses with the expansion of those newer cloud businesses. It also struggled to keep pace with Amazon, Microsoft, and Alphabet's Google in the public cloud market.

IBM's turnaround strategy, which is being led by a new CEO who took the helm last April, is to divest its slower-growth managed infrastructure services segment into a new company called Kyndryl by the end of 2021. It then plans to improve the "new" IBM's hybrid cloud and AI businesses, which were accelerated by its acquisition of Red Hat two years ago, to generate fresh sales growth.

After it completes Kyndryl's spin-off, IBM expects to grow its revenue by the mid-single-digits in 2022 and beyond. However, Kyndryl's businesses generated more than a quarter of IBM's total revenue last year, so the "new" IBM could be valued at roughly three-quarters of the "old" IBM.

If the "new" IBM grows its revenue 5% annually through 2025, it could generate about $70 billion in annual revenue by the final year. IBM currently trades at just 1.6 times this year's sales. But if IBM's newfound growth convinces investors to pay a slightly higher price-to-sales ratio of 2.0, the "new" IBM might be worth about $140 billion by 2025.

Will Palantir be worth more than IBM by 2025? It depends.

If Palantir achieves its ambitious growth targets, its stock could certainly be worth more than the "new" IBM by 2025. However, Palantir will still likely be worth less than the combined value of IBM and Kyndryl, which might grow faster as a stand-alone IT services company that isn't burdened with supporting IBM's higher-growth hybrid cloud and AI businesses.

Palantir and IBM should still appeal to different types of investors over the next four years, but I believe the former will remain a stronger investment than the latter. Palantir's stock is pricier, but its core businesses will likely keep expanding as IBM tries to streamline its sprawling business.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon and Palantir Technologies Inc. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Microsoft, and Palantir Technologies Inc. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Palantir Technologies Inc. Stock Quote
Palantir Technologies Inc.
PLTR
$7.08 (-1.05%) $0.07
IBM Stock Quote
IBM
IBM
$146.23 (0.03%) $0.05

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