Palantir (PLTR 3.73%) turned a lot of heads when it went public through a direct listing three years ago. The secretive data mining and analytics company had been funded by the CIA's investment arm in its early years, and its Gotham platform had already been widely adopted by the U.S. military and most government agencies.
In its S-1 filing, Palantir declared its ultimate goal was to become the "default operating system for data across the U.S. government." It also aimed to expand its commercial Foundry platform by locking in more enterprise customers.
That roadmap looked promising, but Palantir has taken investors on a wild ride since its public debut. Its stock opened at $10 on the first trading day, then nearly quadrupled to its all-time high of $39 on Jan. 27, 2021. But today, it trades at about $16. The bulls retreated as its growth decelerated and rising rates compressed its valuations.
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Palantir might still seem pricey at 61 times forward earnings and 16 times this year's sales, but its profitability is improving and its sales are still rising. So could this divisive tech stock still turn a modest $10,000 investment into $1 million over the long term?
The mathematical path from $10,000 to $1 million
For Palantir to turn $10,000 into $1 million over 20 years, its stock price would need to appreciate at a compound annual growth rate (CAGR) of 26%. Over a 30-year period, it would need to grow at a more modest CAGR of 17%. But that's assuming its valuations hold steady. If investors stop paying a premium for Palantir and its valuations decline, it could take a much longer time for its stock to produce a 100-bagger return.
After Palantir went public, it claimed it could grow its annual revenue by at least 30% between 2021 and 2025. Its revenue rose 47% in 2020 and 41% in 2021, but it only grew 24% in 2022. It expects that slowdown to worsen with just 16% growth in 2023.
Palantir mainly blamed that slowdown on the "lumpy" timing of Gotham's government contracts and macro headwinds for Foundry's enterprise clients. However, it insists it can overcome these near-term challenges as it expands its AI Platform, which helps its clients build new AI apps and analyze more data with large language models.
But from 2022 to 2025, analysts only expect Palantir's revenue to grow at a CAGR of 18% and reach $3.2 billion by the final year, which would be well below its original target of at least $4 billion in revenue. That also means it will likely grow at a much slower rate than many other larger cloud-based software companies.
For example, the digital workflow services provider ServiceNow is expected to grow its revenue at a CAGR of 22% from $7.2 billion to $13.2 billion between 2022 and 2025. The cloud-based data warehousing leader Snowflake is expected to grow its revenue at a CAGR of 31% from $2.1 billion to $4.7 billion between fiscal 2023 (ended this January) and fiscal 2026.
As for their valuations, ServiceNow and Snowflake trade at 12 and 18 times this year's sales, respectively. By comparison, Palantir's forward price-to-sales ratio of 16 might still be a bit too hot relative to its growth potential.
Other signs that Palantir's business is maturing
Palantir only went public three years ago, but the company is actually 20 years old. Therefore, it wouldn't be too surprising if Palantir matures and turns into a slower-growth company over the next two to three decades. We're already seeing two clear signs of that maturation with its rising profits and new buybacks.
Generally speaking, high-growth tech companies should prioritize their revenue growth over profits, then invest their cash back into the business instead of buying back shares. But as Palantir's growth decelerated over the past year, it aggressively reined in its spending and stock-based compensation so it could turn profitable on a generally accepted accounting principles (GAAP) basis over the past three quarters.
A fourth consecutive quarter of GAAP profitability would make it eligible for inclusion in the S&P 500. Those green flags suggest its business model is sustainable, but they also imply its high-growth days are over.
Back in August, Palantir authorized a $1 billion buyback. That's a red flag for growth-oriented investors because it implies its business is maturing and doesn't have any meaningful ways to grow through investments and acquisitions.
Can Palantir help you become a millionaire?
Let's assume Palantir grows its annual revenue at a respectable CAGR of 10% from $1.9 billion in 2022 to $28 billion in 2050. If it's still trading at similar valuations, it might just turn a $10,000 investment into nearly $150,000.
That would be a decent gain, but it wouldn't be enough to make you a millionaire. So instead of thinking of Palantir as a hypergrowth stock, investors should focus on its potential evolution into a stable and more profitable company.
