Palantir Technologies (PLTR 3.53%) has been one of the biggest winners of the artificial intelligence (AI) boom. It led the S&P 500 (^GSPC -0.04%) last year with a 340% gain, and it is currently the second-best performing stock in the index this year, with a 66% gain.
Palantir is particularly popular with retail investors, many of whom admire CEO Alex Karp for his forthright communication and unapologetic viewpoints. But after tenfold returns in the last two years, valuation has become a serious concern for shareholders.
Nevertheless, Dan Ives at Wedbush thinks Palantir will be a $1 trillion company in another two or three years, implying 245% upside from its current market value of $290 billion. It also implies a minimum return of 51% annually over the next three years.
Is that realistic? Here's what investors should know.
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Palantir is a leader in decision-intelligence software and AI platforms
Palantir provides data analytics software that lets customers across the commercial and government sectors integrate information into an ontology, a framework that defines the relationship between digital and physical assets. Users can query the ontology data with analytical tools and machine learning models to find nuanced insights that improve decision-making over time.
Palantir also provides an artificial intelligence platform called AIP that functions as a large language model orchestration tool, adding support for natural language processing to the core data analytics platforms. AIP lets users engage those platforms conversationally. For instance, a bank using Palantir to prevent fraud could tell the platform in plain language to flag and freeze any accounts that meet certain criteria.
International Data Corp. (IDC) recently ranked Palantir as a market leader in decision intelligence software, and Forrester Research recognized the company as a technology leader in artificial intelligence and machine learning platforms. That puts Palantir in front of a big opportunity. AI platform sales are forecast to increase at 40% annually to $153 billion in 2028.
Palantir reported strong financial results in the first quarter, but the stock is very expensive
Palantir looked strong in the first quarter. Customers increased 39% to 769, and the average spend per existing customer rose 24%. In turn, revenue increased 39% to $884 million, the seventh consecutive acceleration, due to especially strong sales growth in the government segment. Meanwhile, non-GAAP (generally accepted accounting principles) earnings jumped 62% to $0.13 per diluted share.
Palantir attributed the strong performance to demand for AIP. "Our foundational investments in ontology and infrastructure have positioned us uniquely to deliver on AI demand," said chief technology officer Shyam Sankar. And the company has continued to capitalize on that demand since the quarter ended. NATO (North Atlantic Treaty Organization) recently purchased AI-enabled warfighting software from Palantir.
Put simply, Palantir's business is firing on all cylinders. However, investors should never buy a stock without first considering valuation. Louie DiPalma at William Blair Research recently told Yahoo! Finance that Palantir is the most expensive software stock on the market. It traded at 64 times forward sales in early May (and has only become more expensive since then). Meanwhile, the next closest stock was CrowdStrike, at 18 times forward sales.
"Palantir theoretically could fall 70% and it would still be tied as the most expensive name in its entire software peer group. So, the stock is not cheap," DiPalma explained.
Investors need to keep that in mind when deciding whether to buy the stock. Personally, I think better opportunities will arise in the future, and I seriously doubt Palantir will be a trillion-dollar company within three years. But it may achieve that market value in five to 10 years.
