It wasn't all that long ago that Palantir Technologies (PLTR 0.68%) was toiling away in obscurity, providing data mining and artificial intelligence (AI) services to a select few intelligence agencies within the U.S. government and its allies as a private company. But Palantir's 2020 IPO shined a light on the vast potential for AI, and its stock was off to the races. Then a combination of a lofty valuation, unrealistic expectations, and gale-force macroeconomic headwinds conspired to knock Palantir down a peg or two in 2021 and 2022, ultimately shaving as much as 84% off the stock's value.
Fast-forward to 2023, and the accelerating adoption of generative AI caused a rapid reversal of fortunes, and Palantir is back in investors' good graces. With a current market cap of just $42 billion, it might seem quite presumptive to suggest Palantir is on track to join the $1 trillion club. Still, it's never too early to consider how a company will perform over the long term.
Let's look at Palantir's history, the current environment, and what the company will have to do to become a trillion-dollar company.
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Palantir has a long track record of success
AI was the talk of the town in 2023, but the technology has been in development for decades. And while it's been public for just over three years, Palantir's business of crafting complex AI systems goes back to early 2003. The company's formation came in the wake of the Sept. 11 terrorist attacks in 2001.
The premise was simple: Properly designed algorithms -- set loose on U.S. intelligence, defense, and law enforcement databases -- could sift through and discover connections between seemingly innocuous bits of information like a one-way plane ticket, rented properties, recurring calls to the Middle East, and large withdrawals from a foreign bank account that, taken together, point to a potential terrorist attack.
The analysis it does has ramifications far beyond intelligence agencies. The same algorithms, retrained and let loose on business data, can help predict customer preferences, calculate product demand, and allocate scarce resources to get the greatest return on investment. In short, Palantir's systems help businesses conduct sophisticated analytics, answer complex questions, and make data-driven decisions -- all of which ultimately save money and/or help companies make more of it.
The linchpin of generative AI
The debut of ChatGPT late last year introduced the world to the significant potential of generative AI. The ability of these AI systems was unlike anything that had come before. They can locate and summarize data, generate original content, review and draft email responses, and compile and evaluate business analytics -- among many other time-saving and productivity-enhancing tasks.
Palantir's long history in the field gave it an edge in fashioning AI tools that would serve the needs of business leaders everywhere, and the company pivoted quickly to create systems to meet that demand.
No one really knows how big the opportunity for AI could be, but those on Wall Street are scrambling to come up with their best estimates, which are mind-boggling. Cathie Wood's Ark Investment Management is among the most bullish, suggesting AI software alone could generate $14 trillion by 2030. A couple of the more conservative forecasts come from analysts at Morgan Stanley and Goldman Sachs, which calculate that the associated productivity gains from AI will generate an incremental economic value of $6 trillion and $7 trillion, respectively, by 2030.
An opportunity this big should produce many winners. Given Palantir's area of expertise, the company is well-positioned to benefit, perhaps propelling it into its next phase of growth.
How Palantir gets there from here
For the third quarter, revenue grew 17% year over year to $558 million. Commercial revenue grew 23% year over year, outpacing government sales, which increased 12%. This resulted in adjusted earnings per share (EPS) of $0.07 and marked "the most significant profit in the company's 20-year history," according to management, as Palantir notched its fourth consecutive quarter of profits under generally accepted accounting principles (GAAP).
The company is forecasting full-year revenue of roughly $2.2 billion at the midpoint of its guidance. That's less than 2% of the company's previously estimated total addressable market of $119 billion -- which Palantir released before generative AI gained outsized interest. Wedbush analyst Dan Ives crunched some numbers and concluded that Palantir's total addressable market in now $800 billion, including the opportunity resulting from generative AI.
If the company were to capture just 7% of the market annually (a pretty conservative estimate given the opportunity), its revenue would quickly expand to $56 billion over the coming decade. Using the company's current adjusted operating margin of 25%, that would result in roughly $14 billion in operating profits.
Palantir stock currently trades for 78 times forward earnings, which could ultimately push the company to a $1.1 trillion market cap over the next 10 years. If the company captures more of its addressable market, its market cap could soar even higher -- even if the stock ultimately gains a more reasonable valuation.
The fine print
To be clear, this is just fun with numbers, but it helps illustrate one path for Palantir to become a trillion-dollar company. This isn't something that's going to happen overnight, and there's a lot that would have to go right for it to achieve a $1 trillion valuation over the next decade or so.
That said, the company is an undisputed expert in the field with more than two decades of experience, while many of its rivals are just getting started. There's also evidence that suggests Palantir is beginning to capitalize on that opportunity. In a recent shareholder letter, management said that demand for its AI platform is "unlike anything we have seen in the past 20 years."
Given the ample opportunity and the company's area of expertise, I believe the intersection of the two could drive Palantir Technologies to a trillion-dollar market cap over the coming 10 years or so. If the company is able to achieve this Herculean feat, shareholders will be the ultimate winners.
