The paradigm shift represented by advancements in artificial intelligence (AI) has had a profound impact on the market since early last year. The speed at which the major players in the AI space have ascended the ranks of the world's most valuable companies has been breathtaking.
Apple has yielded the No. 1 position to Microsoft, but as of this writing, both boast market caps of over $3.3 trillion. As Nvidia's GPUs became the clear favorite hardware for handling AI workloads, the chipmaker soared up the ranks to exceed a value of $3 trillion, and after a brief moment in the top spot, holds the No. 3 position. Alphabet, Amazon, and Meta Platforms -- each of them frontrunners in the AI revolution -- boast market caps of $2.2 trillion, $2 trillion, and $1.2 trillion, respectively.
Though it currently has a market cap of just $58 billion, it isn't hyperbole to suggest that Palantir Technologies (PLTR +2.86%) makes a strong candidate for future membership $1 trillion club. Investors merely need to see the speed at which generative AI is being adopted to understand the magnitude of the opportunity Palantir is addressing.
Image source: Getty Images.
Decades of AI experience
Palantir only came to the attention of AI investors over the past year or so, but the company has a long and distinguished track record of developing AI tools. Its original business focus was on helping the various agencies in the U.S. intelligence community connect their legacy databases, share information, and analyze it, with the goal of allowing them to more effectively uncover potential terrorist plots.
The company has since expanded its offerings, first to other government and law enforcement agencies and then to enterprises, providing AI-based data-mining tools that help management make data-driven decisions. Thanks to Palantir's vast experience with AI, the company was quick to develop additional useful solutions when generative AI came of age early last year.
The company's Artificial Intelligence Platform (AIP) is the result of those efforts. Palantir also developed a unique go-to-market approach that has been wildly successful. To land new customers, the company offers "boot camps" to potential clients during which those businesses rapidly develop AI tools they could actually use to meet their company-specific needs. These workshops allow prospective customers to work side-by-side with Palantir's engineers to solve real-world problems.
In its recent earnings call, management noted that 915 organizations had already participated in boot camps, far outpacing the company's original plan for 500 such workshops. Furthermore, the time it is taking Palantir to close deals is shortening because once prospects try out AIP, they're sold.
The resulting demand has been robust. In the first quarter, Palantir's revenue climbed 21% year over year and 4% sequentially to $634 million. The showstopper metric in the quarter was U.S. commercial revenue, which jumped 40% to $150 million (about 24% of total revenue) thanks to strong demand for AIP.
Palantir also delivered its sixth consecutive quarter of GAAP profitability, and many believe it's only a matter of time before the company is selected for inclusion in the S&P 500. Some investors believe that could happen as soon as this year. Furthermore, its guidance gave investors even more reason to cheer, with management forecasting full-year growth of at least 45% for its U.S. commercial segment.
NASDAQ: PLTR
Key Data Points
The path to $1 trillion
Palantir's long track record of AI expertise and its work with both government and enterprise clients have many customers seeking it out to deploy AI solutions in their operations. One distinct opportunity that may not yet be fully baked into Palantir's stock price is the potential for individual countries seeking to develop sovereign AI solutions, a trend that has already begun. Combine that with the secular tailwinds of enterprise AI adoption and the company's vast opportunity becomes clear. That said, this expansion will take years, if not decades, to play out.
According to the consensus view among Wall Street analysts, Palantir should generate revenue of $2.7 billion in 2024, giving it a forward price-to-sales (P/S) ratio of about 21. Assuming its forward P/S ratio remains constant from here, Palantir would have to grow its annual revenues to roughly $46 billion to support a $1 trillion market cap. Its revenues grew by 21% year over year in the most recent quarter. At that rate, Palantir wouldn't reach the $1 trillion threshold until 2039.
However, there's a big wildcard in play here. Palantir's U.S. commercial revenue -- which includes generative AI -- grew by 70% year over year in 2023's fourth quarter and 40% in 2024's first quarter, but its customer counts grew by 55% and 69%, respectively. These figures help to illustrate the rapid, if uneven, adoption of AI.
As mentioned above, when it delivered its Q1 results, management increased its forecast for the segment, guiding for growth of at least 45% for the year, and it's currently Palantir's biggest growth driver. Furthermore, management has a long track record of issuing conservative guidance. If the company were to deliver average annual revenue growth that was closer to 40%, it could be worth $1 trillion in less than 10 years.
Forecasts regarding the potential for generative AI have been ratcheting higher, but global management consulting firm McKinsey & Company estimates the market could be worth between $2.6 trillion and $4.4 trillion annually.
If Palantir continues along its current trajectory and continues to exploit the AI opportunity, it could reach a $1 trillion market cap sooner rather than later.
