Artificial intelligence (AI) was a big investment theme fueling technology stock growth last year. For instance, enthusiasm for all things AI helped the "Magnificent Seven" stocks provide outsize returns for shareholders and contributed to the Nasdaq Composite's jaw-dropping 43% return in 2023. Of note, five of those Magnificent Seven stocks can boast market capitalizations above $1 trillion (Meta Platforms is quite close at $987 billion and Tesla is at $667 billion).
Meanwhile, a host of other companies are emerging as leaders in AI and taking on big tech. One such business, Palantir Technologies (PLTR 3.73%), has a presence in some of Cathie Wood's Ark Invest funds. Wood was an early supporter of Palantir following the company's initial public offering (IPO) in 2020.
However, Wall Street was somewhat skeptical of the company due to its heavy reliance on government contracts. Throughout 2022, Palantir's main source of revenue from government deals began to decelerate -- causing concerns over the company's growth prospects. For a time in 2022, Wood and Ark Invest exited their position in Palantir entirely, selling over 30 million shares.
After cratering in 2022, Palantir stock rebounded spectacularly last year, as demand for its artificial intelligence (AI) software spiked. Wood and Ark Invest returned to aggressively buying Palantir stock. Currently, Palantir is Ark Invest's 24th largest holding across all of their exchange-traded funds (ETFs). With Palantir's growth prospects looking robust and market investors again buying up its stocks, let's dig in and assess if Palantir could be on its way to a trillion-dollar valuation as it rides the AI wave.
Palantir's potential is massive
For many years Palantir was largely viewed as a government contractor due to its ties with the U.S. military and Western allies. However, since becoming a public company in 2020, Palantir has swiftly shifted from being heavily reliant on lumpy government deals to a more prolific software provider. A big factor in Palantir's penetration of the private sector is its newest product offering, Artificial Intelligence Platform (AIP).
While Wall Street spent most of 2023 enamored with start-ups such as OpenAI, the developer of ChatGPT, Palantir marched forward and started making waves among the AI chatter. In an effort to get the word out about AIP, Palantir's management developed a unique lead generation strategy. Specifically, the company started hosting immersive seminars that it calls "boot camps."
During these events, prospective customers were offered the opportunity to work with Palantir's various software platforms under the direct guidance of Palantir experts to better identify AI use cases. This approach appears to be resonating, as Palantir has added over 100 new private-sector customers over the last 12 months.
Perhaps the most exciting feature of this robust customer acquisition model is Palantir's ability to upsell and cross-sell in these new accounts. The company has been able to quickly bolster its deal pipeline by enticing prospects to test out its software and figure out how Palantir best fits into their AI vision. Subsequently, the rapid adoption of AIP and its sibling products provides Palantir an opportunity to sell across the organization in a more efficient way.
Image source: Getty Images.
The results are impressive, but...
In addition to growing its private-sector operation, Palantir's overall business experienced impressive growth during 2023. In fact, the company posted its fourth consecutive quarter of profitability on a generally accepted accounting principles (GAAP) basis during the third quarter. Not only is this a testament to management's ability to operate a financially sound business, but this milestone also helps fulfill all the criteria necessary for Palantir's eligibility for inclusion in the S&P 500.
While all of this financial and operational progress is encouraging, Palantir still has a long way to go before a $1 trillion valuation seems appropriate.
$1 trillion by 2030 is too optimistic
Currently, Palantir has a market cap of about $35 billion. This represents a multiple of roughly 17 times the company's sales on a trailing-12-month basis. To reach $1 trillion, Palantir would need to increase in value by nearly 29-fold in just six years. That's no easy task.
Let's break down how feasible a $1 trillion market cap by 2030 is.
One of the most bullish Wall Street analysts covering Palantir is Dan Ives of Wedbush Securities. A few months ago, Ives detailed his long-term price target and revenue forecast for Palantir in a research note. He believes that Palantir can reach total annual revenue of $5 billion by 2027. Per management's most recent guidance, Palantir should report $2.2 billion in revenue for all of 2023 (Q4 results have not been released yet).
To reach Ives' 2027 revenue target, Palantir would need to grow at a compound annual growth rate (CAGR) of about 23%. By extrapolating this growth rate beyond 2027, Palantir would theoretically generate $9.4 billion in sales by 2030. Using the company's long-term average price-to-sales (P/S) ratio of 18.6, Palantir's market cap in 2030 would be around $175 billion.
Investors need to understand that the above analysis relies heavily on assumptions. While anything can happen over the next several years, I think it's reasonable to believe that Palantir will not become a $1 trillion enterprise by 2030.
Nevertheless, as generative AI becomes more important for companies of all sizes, Palantir's growth prospects are tough to ignore. It's likely a big reason Cathie Wood and Ark Invest got back into the stock. I think it's reasonable to believe that Palantir can consistently achieve top-line growth above 20%. Given this dynamic, current valuation multiples suggest that the stock has a high chance of becoming a multibagger over the long term.
I think the most important thing to realize is that AI will have multiple winners. While big tech certainly has a commanding position within the AI landscape, investors shouldn't sleep on emerging players like Palantir. So while attaining a $1 trillion valuation by 2030 is probably out of the question, the current tailwinds fueling the company's growth support employing a dollar-cost-averaging strategy for Palantir stock and holding for the long term.
