Technology stocks have witnessed a roller-coaster ride over the past three years, rising impressively in 2021 before collapsing last year on account of surging inflation, high interest rates, the fear of a recession, and weakness in key consumer markets such as smartphones and computers.
Despite the volatility, the tech-focused Nasdaq-100 Technology Sector index has appreciated 23% in the past three years. It is worth noting that the index surged 35% in 2023 alone. However, September was a challenging month for technology stocks as the Nasdaq-100 retreated 5%.
The possibility of the Federal Reserve increasing interest rates further to control inflation and concerns that the rally in artificial intelligence (AI) stocks -- which have given the broader stock market a big boost this year -- could be coming to an end have spooked investors of late. But this also means that investors now have an opportunity to buy shares in some fast-growing companies at relatively attractive valuations.
Let's say you are new to investing and are looking to get started in the stock market with a small amount of just $20 -- which you don't need to pay bills or other expenses -- it may be a good idea to buy Palantir Technologies (PLTR 3.73%). Let's look at the reasons why.
Palantir Technologies is at the beginning of a terrific growth curve
Palantir Technologies stock has crushed the market handsomely in 2023 with solid gains of 132%, but it continues to trade below $20 a pop. The data analytics and mining company, which makes software platforms for U.S. government agencies, has been able to deliver such terrific upside thanks to its outstanding growth.
Palantir has delivered $1.06 billion in revenue in the first half of 2023, a 15% increase over the prior-year period. It expects to finish the year with at least $2.2 billion in revenue, which would be a 16% increase over 2022. More importantly, analysts are anticipating Palantir's revenue growth to accelerate over the next couple of years.
PLTR Revenue Estimates for Current Fiscal Year data by YCharts.
According to the chart above, Palantir's top line could jump 20% annually in 2024 and 2025. But then, don't be surprised to see the company clock faster growth thanks to the massive interest it is witnessing in its Artificial Intelligence Platform (AIP).
In his recent letter to shareholders, Palantir CEO Alex Karp said:
The demand for AIP is unlike anything we have seen in the past twenty years. We are currently in discussions with more than three hundred additional enterprises to deploy AIP within their organizations, all of which are searching for an effective and secure means of adapting the latest large language models for use on their internal systems and proprietary data.
According to Palantir, AIP will allow its customers to deploy large language models (LLMs) on a secure network of their choice. The company is offering this platform for both government and commercial uses, and the good part is that it has already received a major contract worth $463 million from the U.S. Special Operations Command to support AI-focused initiatives.
However, this could be just the beginning for Palantir as the company is reportedly sitting on a potential revenue opportunity worth $1 trillion thanks to AI. More importantly, it has been quickly building a solid customer base to capitalize on such an opportunity. The company finished the second quarter of 2023 with 421 customers, which was a healthy year-over-year increase of 38%.
It is also worth noting that Palantir is witnessing a bump in spending by its customers. The average trailing-12-month revenue from its top 20 customers increased 15% year over year in the second quarter of 2023 to $53 million per customer. The addition of AI-focused applications could help drive further growth in spending by Palantir customers and give the company's earnings growth a nice boost in the long run.
How much upside can you expect?
Palantir is on track to take advantage of a massive market, which explains why analysts are expecting its earnings to increase at an annual rate of 82% for the next five years. The company finished 2022 with $0.06 per share in earnings. Assuming its bottom line increases at a compound annual rate of 82% over the next five years, its earnings could jump to $1.20 per share at the end of 2027.
Multiplying the estimated earnings after five years with the Nasdaq-100's forward earnings multiple of 27 points toward a share price of $32 after five years. That would be more than double Palantir's current stock price, which is why if you have $20 to spare, buying this tech stock could turn out to be a smart long-term move.
