Could Palantir Become the Next Salesforce?

Palantir (PLTR -0.84%) and Salesforce (CRM -1.59%) both own cloud-based platforms that gather and analyze large amounts of data to help their clients make smarter decisions. But with a market cap of $14 billion, Palantir isn't in the same weight class as Salesforce, which is worth about $136 billion.

Analysts expect Salesforce to generate $31 billion in revenue in its fiscal 2023 year (which ends this month), or more than 16 times the $1.9 billion in revenue Palantir was expected to generate in 2022. These two tech companies aren't directly comparable, but could Palantir become as significant as Salesforce over the long term? Let's review Palantir's approach to data mining, how much larger it could grow, and if it could evolve into a blue-chip cloud giant like Salesforce in the future.

Image source: Getty Images.

What sets Palantir apart from Salesforce?

Palantir operates two main platforms: Gotham for government clients and Foundry for enterprise clients. A third cloud-based service, Apollo, provides constant software updates for both Gotham and Foundry.

Gotham and Foundry both accumulate information on individuals and trends from a wide range of disparate sources. They analyze all that information to help organizations make smarter data-driven decisions.

Gotham is widely used by the U.S. military and government agencies. It was reportedly used to locate Osama bin Laden in 2011, and it's been deployed by Immigration and Customs Enforcement (ICE) to track and deport undocumented immigrants. In its S-1 filing, Palantir boldly predicted that Gotham would eventually become the "default operating system for data across the U.S. government." Meanwhile, large enterprise customers like Ferrari, Hertz, and Airbus use Foundry.

By comparison, Salesforce's eponymous customer relationship management (CRM) platform enables large organizations to track their relationships with individual customers. It also provides additional cloud-based sales, marketing, data visualization, communications, and analytics tools. Its AI platform, Einstein, help those clients make data-driven decisions.

Salesforce serves both private sector and government customers, but it's not as dependent on U.S. government agencies as Palantir. That's a double-edged sword for Palantir -- government contracts are generally resistant to macro headwinds, but the company doesn't have much pricing power in those negotiations. The U.S. government can also refuse to renew its contracts or gradually pivot toward custom in-house tools like RAVEn, a similar data mining platform which was internally developed by multiple contractors to replace Palantir's Gotham. ICE already laid out its plans to replace its custom version of Gotham (called FALCON) with RAVEn in 2021, and other government agencies could follow its lead. 

How fast is Palantir growing?

Palantir's revenue grew 47% in 2020 and rose another 41% in 2021. But for 2022, it expects its revenue to increase just 23% to $1.9 billion. That deceleration was caused by a significant slowdown in the growth of its government revenue throughout the first half of 2022. The growth of its commercial business also cooled off significantly as larger companies reined in their spending to cope with the macroeconomic headwinds.

Data source: Palantir. YOY = Year-over-year.

Despite all those challenges, Palantir believes it can generate at least $4.5 billion in revenue by 2025, which implies it can still grow its top line at a compound annual growth rate (CAGR) of 31% from 2021 to 2025. It also believes it can turn profitable by the final year.

That long-term outlook is encouraging, and implies Palantir will continue to grow much faster than Salesforce. Salesforce's revenue rose 24% in fiscal 2021 (which ended in January 2021) and increased 25% in fiscal 2022, and it's expecting 17% growth to about $31 billion in fiscal 2023. Salesforce expects to generate $50 billion in annual revenue by fiscal 2026, which implies its top line will still grow at a respectable CAGR of 17% through fiscal 2023.

However, those numbers also tell us that Palantir won't come anywhere close to matching Salesforce's market cap anytime soon. Palantir trades at nearly 6 times next year's sales, and it could be valued at nearly $30 billion by 2025 if its valuations hold steady. Salesforce currently trades at just 4 times this year's sales, so it could be worth $200 billion by fiscal 2026 (calendar 2025) if it's still trading at a similar price-to-sales ratio.

It's an apples-to-oranges comparison

Palantir won't become as large as Salesforce, but both companies can continue to grow in their respective markets. Palantir's firm foothold in the U.S. government should make it a top choice for defense contracts, and that battle-hardened reputation could attract more enterprise customers. Salesforce should continue to lead the cloud-based CRM market, and it should benefit from the digitization of older companies that still store all of their customer data on paper documents or local software.