Palantir Technologies (PLTR 4.30%) is one of the most popular artificial intelligence (AI) stocks on the market, but it got that way by having a ton of hype baked into the stock. Currently, it sits at a $330 billion valuation; however, its revenue and profits are dramatically smaller than those of every company around it. As a result, I won't be surprised if these three companies are larger than it within the next three years.
The three stocks are Advance Micro Devices (AMD 0.67%), Salesforce (CRM 3.09%), and ASML (ASML +4.02%). All of these companies have strong growth cases but are also much larger than Palantir from a revenue and profit viewpoint. I think these three will be larger than Palantir by 2028, but there's another reason why this trio should be valued at a higher level by then as well.
Image source: Getty Images.
Palantir's financials are much different than this trio
Palantir is an AI-first data analytics company that gives its users actionable insights based on the information that's run through its platform. Palantir started as a government-serving entity but expanded beyond that client base to the commercial side. That transition went extremely well, with both client bases making up a significant chunk of Palantir's revenue.
Palantir has become one of the more hyped-up AI stocks, and it rose to a sky-high valuation that normally isn't seen with companies with the level of growth that it has.
Palantir's market cap of $330 billion is much larger than AMD's ($206 billion), Salesforce's ($248 billion), or ASML's ($300 billion). However, all three of these companies produce much higher revenue and profits than Palantir.
PLTR Revenue (TTM) data by YCharts
From a revenue standpoint, Palantir is about 1/10 of the size of this trio, and depending on which company it's compared to, anywhere from a fourth of the profits up to about 1/20 of the profits. So, why is Palantir valued as highly as this trio? After all, AMD, ASML, and Salesforce are all key competitors and beneficiaries of the AI arms race.
It all comes down to how much the market believes these stocks will grow over the next few years.
Palantir's growth is about the same as ASML's and AMD's
Palantir put up impressive growth over the past few quarters, including 39% growth in Q1 and projected growth of 38% in Q2. While Palantir has been delivering impressive growth for a bit longer than some other companies, it's not the fastest-growing business on this list.
PLTR Operating Revenue (Quarterly YoY Growth) data by YCharts
However, it's unlikely that ASML or AMD can keep up these elevated growth rates for the long term, which is why Palantir has a premium attached to the stock.
From a price-to-sales (P/S) ratio standpoint, Palantir is valued at a massive premium to these other companies.
PLTR PS Ratio data by YCharts
Palantir deserves somewhat of a premium based on its strong growth and large runway, but 112 times sales is absurd. Few companies have ever achieved that valuation, and if a company has it, it most likely doubles its revenue quarter after quarter. Palantir isn't even close to that.
At most, I'd assign Palantir a 40 times sales premium, as any time a software company's growth rate is less than its P/S ratio (besides fully mature companies that have achieved maximum profitability), it's very expensive. Palantir is way over this threshold, which is why I think there's pain to come in the future.
While AMD, ASML, and Salesforce are great investments in their own right, they will be larger stocks than Palantir in three years because I expect Palantir's stock to return to Earth. When that occurs, those three will rightfully be larger than Palantir based solely on how much money they generate as a business.
