One of the clear and present trends driving the market since early last year is that of artificial intelligence (AI). Investors need only review the list of the world's most valuable companies to see this paradigm shift on full display. Indeed, seven of the top 10 are major players in the race to adopt generative AI, with others climbing the ranks at a breathtaking pace.
Apple and Microsoft each have a market cap that exceeds $3 trillion (as of this writing). Nvidia stock has been extremely volatile, but still ranks third at $2.6 trillion. Alphabet, Amazon, and Meta Platforms have market caps of $1.9 trillion, $1.7 trillion, and $1.2 trillion, respectively. The common thread that runs through these market leaders is the vast opportunity represented by AI.
Though it currently has a market cap of just $60 billion, it might seem outlandish to suggest that Palantir Technologies (PLTR 0.32%) is making all the right moves to secure membership in the $1 trillion club. Yet, while many companies are still formulating an AI strategy, Palantir has developed a novel solution that is already ringing the cash register.
Image source: Getty Images.
Decades of AI experience
Palantir became a publicly traded stock in late 2020, but the company has been working on AI in relative obscurity for more than two decades. After honing its craft by developing AI solutions for the U.S. government and its allies, Palantir turned its attention to creating actionable intelligence for enterprise-level companies.
As the godfather of AI solutions, Palantir immediately recognized the implications of generative AI, and its years of experience allowed the company to move quickly to capitalize on the opportunity. The fruit of its labors is Palantir's Artificial Intelligence Platform (AIP), which uses generative AI to solve business-specific problems. However, it was the company's "teach a person to fish" approach that has won rave reviews from customers. It hosts boot camps to develop AI tools companies can actually use. In these workshops, users work side-by-side with Palantir engineers to find solutions to their most pressing business problems.
Palantir revealed just this week that more than 1,025 organizations have completed boot camps since mid-2023. Many resulted in seven-figures deals signed just days or weeks after the completion of a boot camp session. This drove more than $1 billion in contract value added during the quarter. Palantir previously revealed that it's "seeing the acceleration of larger deals and shorter times to conversion" as boot camp attendees see firsthand the value of this approach to AI adoption.
This strategy has accelerated Palantir's results. In the second quarter, the company's revenue of $678 million climbed 27% year over year and 7% sequentially. The headliner was its U.S. commercial revenue, which jumped 55% to $159 million, and represented 23% of total revenue, thanks to a strong showing from AIP.
The path to $1 trillion
Palantir's long history of AI expertise has given the company a clear advantage for government and enterprise customers looking to implement the latest AI solutions. Furthermore, generative AI has attracted the attention of the world's governments, with many looking to develop sovereign AI solutions, representing another compelling opportunity. Add to that the speed at which enterprises are adopting AI, and the magnitude of the opportunity comes into focus. However, this is a trend that will likely take years or even decades to come to fruition.
According to Wall Street, Palantir is forecast to generate sales of $2.7 billion in 2024, giving it a forward price-to-sales (P/S) ratio of about 22. Assuming its P/S remains constant, Palantir would have to grow its revenue to roughly $45 billion annually to support a $1 trillion market cap. Revenue grew by 27% year over year in the most recent quarter. At that rate, Palantir could reach the $1 trillion threshold by 2036.
However, generative AI adoption is growing by leaps and bounds. Palantir's U.S. commercial revenue -- composed primarily of generative AI solutions -- grew 40% year over year in the first quarter and 55% in the second quarter. At the same time, the segment's customer count grew by 69% and 83%, respectively, so business is clearly accelerating.
Furthermore, management has increased its forecast for the U.S. commercial segment, guiding for growth of at least 47% for the full year. Not only is it the company's biggest growth driver, but now accounts for 23% of total sales. As generative AI becomes a greater percentage of overall revenue -- and if the accelerating growth continues -- Palantir could join this elite fraternity much sooner. For example, if the company's revenue growth approaches 40% -- the low end of the segment's recent trajectory -- it could become a trillionaire in less than a decade.
Estimates regarding the potential for generative AI continue to tick higher, but truthfully, no one knows for sure how big it could ultimately be. Estimate suggest the market could grow to between $2.6 trillion and $4.4 trillion annually, according to global management consulting firm McKinsey & Company.
If Palantir's growth continues to accelerate and the company maintains its position as the go-to for adopting AI, it won't be terribly long before it sports a market cap of $1 trillion.
And that's why Palantir stock is a buy.
