Palantir's (PLTR -3.12%) stock closed at an all-time high of $39 per share in January 2021. At the time, investors were impressed by the data-mining company's formidable reputation and robust revenue growth, and the Reddit-driven rally in hypergrowth and meme stocks amplified its gains. However, it subsequently plunged to about $8 per share as investors fretted over its slowing growth, declining margins, and lack of profits.

Can Palantir reverse that bearish trend over the next 12 months?

Palantir's hypergrowth days could be over

Palantir collects and analyzes data through two main data analytics platforms: Gotham, which mainly supports government agencies; and Foundry, which serves commercial customers. A third service, Apollo, feeds constant software updates into both platforms.

Two soldiers work and an IT professional looking at two monitors.

Image source: Getty Images.

When the company went public, Palantir's government business grew at a much faster clip than its commercial segment. Its revenue rose 47% to $1.09 billion in 2020, with its government revenue soaring 77% to $610 million and its commercial revenue rising 22% to $482 million. In 2021, Palantir's revenue jumped another 41% to $1.54 billion, with its government revenue increasing 47% to $897 million and its commercial revenue growing 34% to $645 million.

But if we break down its growth by quarters, we'll notice that its commercial business started growing faster than its government segment in the second half of 2021, and that trend continued throughout the first half of 2022:

Metric

Q2 2022

Q1 2022

Q4 2021

Q3 2021

Q2 2021

Government revenue growth (YOY)

13%

16%

26%

34%

66%

Commercial revenue growth (YOY)

46%

54%

47%

37%

28%

Total revenue growth (YOY)

26%

31%

34%

36%

49%

Data source: Palantir. YOY = year over year.

The robust growth of Palantir's commercial business is encouraging because it can gradually reduce its long-term dependence on rigid government contracts. However, the ongoing deceleration of its government business is worrisome, since it coincides with reports that U.S. government agencies have been developing their own data mining systems (like RAVEn) to gradually replace Palantir's solutions. That slowdown tosses cold water on the company's long-term goal, as stated in its S-1 filing, to become the "default operating system for data across the U.S. government."

To make matter worse, Palantir's gross and operating margins steadily declined on a non-GAAP basis over the past year. That ongoing compression suggests a loss in pricing power.

Metric

Q2 2022

Q1 2022

Q4 2021

Q3 2021

Q2 2021

Gross margin

81%

81%

83%

82%

82%

Operating margin

23%

26%

29%

30%

31%

Data source: Palantir. Non-GAAP basis.

It also suggests Palantir's losses will continue to widen. On a GAAP basis, the company's net loss widened from $580 million in 2019 to $1.17 billion in 2020 (mainly due to the costs of its direct listing), then narrowed to $520 million in 2021. However, analysts expect its net loss to only shrink slightly to $502 million this year and stay in the red through at least 2024.

Are Palantir's long-term targets realistic?

Palantir expects its revenue to rise 23%-24% this year. However, CEO Alex Karp said he believes the company can still generate at least $4.5 billion in revenue by 2025, which will require its top line to increase at a compound annual growth rate (CAGR) of 31% from 2021 to 2025. Karp also believes it will turn profitable by 2025.

That's a very bullish outlook that glosses over its decelerating revenue growth and declining margins, while seemingly ignoring the threat of internally developed data-mining platforms at government agencies and competition in the crowded commercial space from similar services like Salesforce's Mulesoft Anypoint and Alteryx.

Karp believes the "next 10 years are going to be more ... dangerous than the last 10 years" amid social unrest and geopolitical conflicts, and that troubling trend will fuel more demand for its services.

That might happen, but Palantir's near-term outlook still seems grim as the growth of its government business fizzles out and its commercial segment grapples with tougher macro headwinds. Palantir signed a few new deals with the U.S. Army and Hertz over the past month, but it's still too early to tell if any of those new contracts will move the overall needle.

Where will Palantir's stock be in a year?

Analysts expect Palantir's revenue to rise 23% this year, then grow 25% to $2.37 billion in 2023. Based on those expectations, Palantir's stock trades at seven times next year's sales. That price-to-sales ratio isn't cheap relative to other companies that are generating comparable growth. Twilio, which is expected to grow its revenue by 36% this year and 27% next year, trades at less than three times next year's sales. Unity Software, which is expected to generate more than 20% revenue growth in 2022 and 2023, trades at five times next year's sales.

Therefore, I don't expect Palantir's stock to rally much higher over the next 12 months as its growth cools off. Instead, I believe it could tumble even lower as rising interest rates continue to punish imperfect growth stocks.