It has been just over three years since Palantir Technologies (PLTR 3.41%) made its stock market debut through a direct listing, and shares of the company delivered healthy gains of almost 83% since then despite bouts of massive volatility.
Palantir surged after it went public, but the tech sell-off of 2022 weighed heavily on the stock. However, 2023 has turned out to be a solid year for investors, as shares of the company -- which provides data analytics and software services to U.S. government agencies and commercial customers -- have surged 170% as of this writing. That's not surprising, as Palantir is being touted as a potential beneficiary of the growing demand for artificial intelligence (AI) software.
As such, now would be a good time to take a look at Palantir's business and see whether this tech stock can sustain its impressive momentum on the market over the next five years.
NASDAQ: PLTR
Key Data Points
Palantir Technologies is sitting on a huge growth opportunity
Though AI has been one of the key drivers behind Palantir stock's impressive surge this year, it is worth noting that the company's business is already in healthy shape.
Palantir's revenue in the first six months of 2023 increased 15% compared to the same period last year to about $1.06 billion. The company recently raised its revenue guidance and expects to finish the year with $2.21 billion in revenue, which would be a 16% improvement over 2022.
What's more, analysts are anticipating the company's earnings to almost quadruple in 2023 to $0.23 per share from $0.06 per share last year.
Palantir's robust growth can be attributed to its growing customer base and a jump in customer spending. It ended the second quarter of 2023 with 421 customers, a nice jump of 38% over the year-ago period. More importantly, Palantir's billings increased at a faster pace of 52% during the quarter to $603 million.
This spike in billings is an indication that Palantir is signing more customer contracts, as this metric usually refers to the annual amount billed by a SaaS (software-as-a-service) company to its customers. So the robust jump in Palantir's billings points toward a stronger revenue pipeline.
One of the reasons why Palantir's billings have jumped so nicely is because of an increase in spending by existing customers. This is evident from Palantir's net dollar retention rate of 110%.
This metric compares the trailing twelve-month (TTM) revenue from Palantir's customers at the end of a period to the TTM revenue generated by the same set of customers during the prior-year period. A reading of more than 100% means that Palantir's customers used more of its services.
It is worth noting that Palantir estimated its total addressable market (TAM) at $119 billion across both commercial and government sectors in 2020. There is a good chance that the addressable opportunity has improved over the past three years thanks to new catalysts such as AI.
Dan Ives of Wedbush Securities estimates that Palantir's AI-driven TAM could be a whopping $800 billion, which is way higher than the original revenue opportunity the company was sitting on before going public.
This explains why Palantir's growth is expected to accelerate.
PLTR Revenue Estimates for Current Fiscal Year data by YCharts
Healthy long-term upside could be in the cards
Ives estimates that Palantir could eventually achieve $5 billion in annual revenue by 2027. Based on its 2023 revenue estimate of $2.21 billion, a $5 billion revenue estimate for 2027 indicates that the company's top line could increase at a compound annual growth rate of 22% for the next four years. That would be higher than Palantir's estimated revenue growth in 2023.
AI is going to play a central role in this potential acceleration considering the huge revenue opportunity it is expected to unlock for Palantir. More importantly, Palantir has already started winning substantial AI-related contracts.
For instance, Palantir won a three-year, $250 million contract from the U.S. Army earlier this month to provide AI and machine learning (ML) capabilities. Before this, Palantir was awarded a $463 million AI contract in June by the U.S. Special Operations Command.
Also, the company has built a nice ecosystem of commercial customers for its recently launched Artificial Intelligence Platform (AIP), which includes the likes of Cisco, J.D. Power, Molson Coors, PwC, and others.
All this indicates that Palantir could indeed hit $5 billion in revenue by 2025, as Wedbush estimates. Even better, analysts are expecting the company's bottom line to increase at a CAGR of 82% for the next five years. Based on Palantir's 2022 earnings of $0.06 per share, its bottom line could jump to $1.20 per share by the end of 2027.
Palantir currently trades at 69 times forward earnings, which is on the expensive side. However, it can justify that expensive valuation by delivering rapid growth in its revenue and earnings. Even assuming a discounted forward earnings multiple of 40, Palantir's stock price could jump to $48 after five years. That would be a 180% jump from current levels.
Investors looking for a growth stock that could take advantage of fast-growing tech trends such as AI can consider buying shares of Palantir even after the impressive gains it has delivered so far this year.
