Palantir Technologies (PLTR -2.74%) is getting its share of hype, and for good reason. The software, artificial intelligence (AI), and analytics platform for enterprises and governments has been growing quickly since going public in 2020. It's also growing a legion of enthusiastic shareholders. Some of that enthusiasm is related to its eccentric CEO, who has done things his own way to disrupt a once stodgy industry (government defense spending).
The growth (and the hype) has some arguing that Palantir is poised to become one of the next big technology stocks. Can the AI upstart join the "Magnificient Seven" by 2030? Let's take a closer look and find out.
AI software for commercial and government customers
Palantir was founded back in 2004 as a big-data and analytics-software platform. Its goal was to sell innovative and modern software solutions to government agencies and the Department of Defense. At the time, many Silicon Valley companies were hesitant to get involved in certain government-related work because it was deemed by some to be politically fraught. Palantir's willingness to work with the government at that time has turned out to be advantageous. There was a huge opportunity to modernize the software and analytics platforms for the United States and its allies. Palantir's government segment now generates $1.27 billion in revenue on an annualized basis.
After landing with government agencies, Palantir moved to start selling its analytics programs to large commercial customers. It has 427 commercial customers today, up from just 49 back at the end of 2020. In recent years, the company has invested heavily in its artificial intelligence platform (AIP) to further advance its platform for its large customers.
I'm not going to pretend to understand how these AI tools work, but the technology departments at all these companies and government agencies seem to like them. Palantir now has 554 total customers, up from 139 at the end of 2020. These customers value Palantir's software platform, which should lead to more customer wins around the world. This, in turn, can drive revenue growth for years to come.
More strong growth, profits finally arriving
Speaking of revenue, last quarter Palantir put up strong top-line results. Sales grew 21% year over year to $634 million, driven by U.S. commercial revenue growing 40% year over year. The company also grew its customer count by 40% year over year, which is a good indicator of future revenue growth.
Another positive thing about Palantir is the fact that it is growing while generating profits. A couple of years ago, Palantir had an operating margin of negative 100%. Over the last 12 months, it has posted a positive 8% margin that continues to climb higher. With extremely high gross margins, I would expect Palantir's bottom-line profitability to be quite healthy once it matures.
PLTR Revenue (TTM) data by YCharts.
Can this be a big tech stock?
There's a lot to like about Palantir. However, optimistic investors need to be realistic about whether this company will be a technology giant anytime soon. It is simply not a large enough business financially.
Palantir did $2.3 billion in revenue over the last 12 months. Revenue has grown at a 30% rate since 2018. Let's say the company can grow at a 30% rate from now until 2030. With these estimates, Palantir will likely generate $18 billion in revenue annually by 2030. Not bad. However, many of these big technology companies generate annual revenue exceeding $200 billion today. Alphabet did $318 billion in sales over the past 12 months while Microsoft did $237 billion, all with strong gross margins like Palantir. That is more than 10 times what Palantir could generate if revenue keeps growing at a 30% rate for seven straight years.
Can Palantir be a good stock to own over the long term? Sure it can, as long as it keeps growing revenue quickly and generating healthy profits. But a big technology stock this is not.
