Palantir Technologies (PLTR -2.06%) has surged in the double-digits this year even as many other tech stocks struggled -- and the artificial intelligence (AI) software company's valuation also has soared. Now, is Palantir set to drop nearly 30% as the average Wall Street forecast suggests? No, Palantir stock isn't necessarily heading for tough times in the months to come.
It's true Palantir shares, trading for 237 times forward earnings estimates, are expensive, but it's important to remember this isn't a new phenomenon. Though valuation has climbed in recent times, the stock has been considered pricey over the past few years, and this hasn't slowed down the momentum.
This may be due to elements that also support ongoing gains for Palantir, even if the stock takes a pause or pulls back a bit here and there. Let's take a closer look at why Palantir probably isn't heading for a drop of almost 30% in the coming 12 months.
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Why has Palantir stock soared?
First, let's consider why Palantir's stock has soared so much in recent years. The company has spent more than two decades honing its expertise, with a software platform that helps customers optimize the use of their data. The addition of AI to this in recent times, creating Palantir's Artificial Intelligence Platform (AIP), supercharged the company's capabilities -- and both government and commercial customers are sitting up and taking notice.
Governments are using AIP to make faster and better decisions during military missions, hospitals are using the platform to better manage patient flow and resources, and companies are using it for a wide range of tasks too -- Wendy's, for instance, is using AIP to improve its supply chain management.
In the past, government contracts generated most of Palantir's revenue, but in recent quarters, commercial business has picked up significant momentum thanks to AIP. Now, both businesses deliver double-digit revenue growth on a quarterly basis. For example, in the latest quarter U.S. government and U.S. commercial revenue advanced 45% and 71%, respectively. And in the previous quarter, they gained 45% and 64%. All of this helped Palantir stock rise 340% last year and extend those gains this year, climbing more than 80%.
Demand for Palantir's AIP
A few elements may support further gains or at the very least prevent Palantir's stock from declining significantly. One clue is that, even during the general uncertainty that's weighed on stocks in recent months, Palantir continued to see high demand, a signal that some economic pressure may not hurt the software company. So, today, I'm not worried about demand in the months to come as it should continue to remain strong unless the economic situation changes dramatically.
And as this demand potentially delivers higher revenue, long-term investors focused on growth may continue to pile into this stock. It's also important to note that some of these investors don't always focus on valuation, a measure that doesn't account for potential growth a few years down the road. Also, certain tech investors look more at a company's innovations and how these innovations may drive growth over time rather than metrics like valuation. Investors may also like the following number: Palantir has managed to balance growth and profit, as seen in its Rule of 40 score of 83%. A score of 40% or higher shows a good balance so clearly Palantir has exceled on this point.
Finally, analysts forecast the AI market, at a compound annual growth rate in the double-digits, will surpass $2 trillion in the coming years. This and demand so far suggest companies are eager to apply AI to their businesses, and Palantir's AIP makes it easy for them to do that -- and generate game-changing solutions.
These points could help Palantir advance over the coming year, or at least avoid significant declines. But here's the best new of all: No matter what the stock does in the short term, there's reason to be optimistic about Palantir advancing over the long term -- meaning that even if you buy the stock at today's price, you still could score a win down the road.
