Growth stocks have been in fine form on the market over the past year thanks to numerous reasons, including cooling inflation, the Federal Reserve's pause on interest rate hikes, and a resilient economy. That momentum looks set to continue in 2024.
Investment research firm Fundstrat's Tom Lee predicts that the S&P 500 index will jump as much as 30% this year from 2023 levels. The Nasdaq-100 index is also seeing forecasts of robust gains in 2024 following the impressive 54% jump it clocked in 2023. That's because the Nasdaq-100 has historically averaged a 24% gain in the year which follows a year with 40%-plus gains, according to fintech broker Capex.com.
The market could keep soaring, as the Fed is anticipated to cut the interest rate four times this year, according to Goldman Sachs, as inflation hits the central bank's target of 2%. This could pave the way for more gains at Palantir Technologies (PLTR 3.73%) following the growth stock's red-hot 116% surge in the past year.
In other words, $1,000 invested in Palantir stock a year ago is now worth roughly $2,170. Assuming you have $1,000 in investible cash now after paying your bills, clearing any high-interest debt, and saving for rough times, it may be a good idea to put that money into Palantir stock. Let's look at the reasons why.
Palantir Technologies' growth is set to pick up the pace
Palantir Technologies is known for providing software platforms to government agencies to help them in counterterrorism and intelligence operations, while it also provides solutions to commercial customers for organizing and analyzing their data. The company has witnessed robust demand for its offerings over the years, which explains why its top line has been heading consistently north.
PLTR Revenue (TTM) data by YCharts.
However, a slowdown in government spending means that Palantir's 2023 revenue growth of 16% would be its slowest since the time it went public in late 2020. With the government business accounting for 55% of Palantir's top line in the third quarter of 2023, it is not surprising to see why tepid government spending is likely to weigh on the company's growth.
For some perspective, Palantir's government revenue was up 12% in the third quarter of 2023 to $308 million. Its overall revenue, however, increased 17% year over year to $558 million as revenue from commercial customers was up 23% to $251 million. In simple words, the faster growth in the commercial business helped outpace the tepid performance of the government business.
The good news for Palantir investors is that the company expects its "U.S. government business to reaccelerate beyond the current growth rate of 10% year over year, given the increasing demand for those products to support our allies around the world." A potential acceleration in this segment, along with the impressive momentum in Palantir's commercial business is the reason why consensus estimates are projecting an improvement in the company's growth.
Its revenue in 2024 is expected to jump almost 20% to $2.66 billion. What's more, the company's earnings are expected to jump to almost $0.36 per share in 2025 from the 2023 estimate of $0.25 per share. The following chart points toward an acceleration in Palantir's earnings in 2024 and 2025.
PLTR EPS Estimates for Current Fiscal Year data by YCharts.
It is also worth noting that Palantir's earnings could clock a compound annual growth rate (CAGR) of 85% for the next five years, according to consensus estimates. That would be a big improvement over the 8% annual decline in its bottom line over the past five years. A big reason analysts expect such terrific bottom-line growth from Palantir is because of the company's prospects in the artificial intelligence (AI) platforms software market, a niche that's expected to boom big-time in the long run.
TechNavio estimates that the global artificial intelligence platforms market could clock annual growth of almost 35% between 2022 and 2027, generating an incremental $31 billion in revenue during this period. According to market research firm IDC, Palantir was the leading player in this market in 2021, suggesting that it seems well-placed to tap this incremental growth opportunity.
The good part is that the company has already witnessed solid interest in its AI software platform which was launched last year. It is looking to push the envelope further by organizing boot camps that could bring more customers into its fold. Wall Street is also upbeat about Palantir's AI prospects, with one analyst pointing out that it could be sitting on a $1 trillion revenue opportunity in this space.
As such, it won't be surprising to see Palantir's growth accelerating sharply, and that could lead to impressive long-term upside.
This growth stock is built for more gains
We have already seen that analysts expect Palantir's earnings to grow at a CAGR of 85% for the next five years. Assuming that its bottom line increases at a slower pace of even 50%, its earnings could jump to $1.90 per share (using 2023's estimated earnings of $0.25 per share as the base) after five years.
Using the Nasdaq-100 as a proxy for tech stocks and multiplying the index's forward earnings multiple of 29 with Palantir's projected earnings of $1.90 after five years points toward a stock price of $55. That's more than thrice the company's current stock price, indicating that a $1,000 investment made in Palantir stock right now could triple over the next five years considering the terrific growth it is anticipated to deliver.
That's why investors who have $1,000 in investible cash and are looking to buy a growth stock should consider buying Palantir before it flies higher.
