The advent of artificial intelligence (AI) last year caught many market watchers by surprise, particularly with how quickly it changed the paradigm among some of the world's most valuable companies. Apple ceded the top spot to Microsoft, which now rules the roost with a market cap of over $3 trillion. Nvidia moved quickly up the charts to assume the No. 3 spot behind Apple with a market cap of $2.3 trillion, spurred on by its gold-standard AI chips. Alphabet, Amazon, and Meta Platforms -- each with their own AI solutions -- are also members of this prestigious fraternity.
With Palantir Technologies' (PLTR 3.73%) market cap of just $54 billion (as of this writing), it might seem like a longshot to suggest that it is vying for membership in the $1 trillion club. However, the accelerating demand for AI and the company's expertise in the field suggest the odds are likely in Palantir's favor.
Image source: Getty Images.
AI before it went "viral"
It wasn't very long ago that Palantir was relatively unknown outside of government agency circles. The data mining and AI specialist worked closely with the intelligence community in the U.S. to ferret out terrorists and prevent attacks before they happened. Palantir soon expanded beyond its original mandate, creating sophisticated built-to-order AI models for other government agencies and enterprises, helping discover valuable insights hidden deep within their data.
Palantir sprung into action when the market for generative AI exploded early last year, putting decades of expertise to work and developing a solution that could be broadly applied. The fruit of those labors is the Artificial Intelligence Platform (AIP), the company's home-grown generative AI system, which Palantir developed in a matter of months. However, it's the company's go-to-market strategy that is spurring the greatest demand.
To capitalize on the opportunity, Palantir is holding boot camps. "These immersive, hands-on-keyboard sessions allow new and existing customers to build live alongside Palantir engineers, all working toward the common goal of deploying AI in operations," management wrote in the company's fourth-quarter business update. Attendance at these sessions has been off the charts, as businesses have the opportunity to increase productivity or solve their most pressing business problems using generative AI solutions.
In October, Palantir laid out plans to hold 500 boot camps over the coming year. The company has since "blown that goal out of the water," completing over 560 boot camps for 465 organizations in just four months.
That strong and growing demand is driving robust financial results. In the fourth quarter, Palantir's revenue of $608 million climbed 20% year over year and 9% sequentially. The biggest contributor was U.S. commercial revenue, which surged 70%, driven by demand for AIP. Palantir delivered its fifth consecutive quarter of profitability, making it eligible to join the S&P 500 index, which some market watchers believe that will happen this year.
It was management's outlook that really turned heads, as the company is forecasting at least 40% growth for the U.S. commercial segment -- which includes AIP -- over the coming year.
The path to $1 trillion
Palantir is in a unique position among AI providers. The company has a long history of AI expertise and a solid track record of fulfilling government contracts. That gives Palantir an edge in providing AI solutions to the U.S. government and its allies, and many believe the quest for sovereign AI among nations has already begun. Add to that the vast potential within enterprise businesses and the opportunity becomes clear -- but it won't happen overnight.
According to Wall Street, Palantir is poised to generate revenue of $2.71 billion in 2024 and $3.23 billion by 2025, giving it a forward price-to-sales (P/S) ratio of about 16. Assuming its P/S remains constant, Palantir would have to grow its revenue to roughly $60 billion annually to support a $1 trillion market cap. Revenue grew by 20% year over year in the most recent quarter. At that rate, it would take 16 years for Palantir to reach the $1 trillion threshold.
However, its U.S. commercial business -- fueled by generative AI -- grew by 70% in Q4, and management is guiding for at least 40% growth for the segment, so it could soon eclipse its other sales. Palantir has a tendency to under promise and over-deliver, so that estimate could well be conservative. If the company grew its revenue closer to 40%, it could be worth $1 trillion or more within a decade.
Estimates regarding generative AI are growing by leaps and bounds, but it's estimated the market will be worth between $2.6 trillion and $4.4 trillion annually, according to global management consulting firm McKinsey & Company.
If Palantir captures just a small part of that large and growing opportunity, it won't be long before it has secured membership in the $1 trillion club.
