Even in the high-flying artificial intelligence (AI) space, there aren't too many stocks that have performed better than the AI decision-making company Palantir (PLTR 1.60%). The stock is up over 88% this year and has reached a $334 billion market cap.
Since going public in 2020, Palantir delivered an astounding total return of 1,440%. That's not too shabby for a company that may have had a tough time initially explaining to investors what it does and why its potential market is so huge. After the big run, Palantir now trades at roughly 245 times forward earnings. Can you still buy the stock at this massive valuation?
From government contractor to a big commercial player
Palantir's technology can pull in large datasets from different sources and then analyze that data to provide actionable insights. The company's Gotham platform helps users find hidden patterns buried within large, complex datasets, ranging from intelligence sources to reports from confidential informants. Gotham also helps users plan and carry out real-world responses to threats discovered on the platform. According to Palantir, Gotham is used across the government and has been used by the Department of Defense in counter-terrorism operations.
Image source: Getty Images.
Palantir also has other platforms purposed for broader business use cases. The company's Foundry platform creates a central operating system for all data that a company may need. Palantir in its annual report said, "The speed with which users can experiment and test new ideas is what makes the software stick." The platform is built to solve one of the core issues behind all data projects, which is allowing people to track how an original data project was built and where that data came from.
Plenty of businesses now use Palantir's Foundry platform. United Airlines uses it to monitor its in-flight Wi-Fi to quickly identify and correct connectivity issues. The company also partnered with Palantir to build a database of millions of technician summaries since 2016, which it used to develop predictive capabilities for equipment breakdowns it can now more quickly discover and correct. All of this led to fewer delayed flights and cancellations.
Palantir now has a nice stream of commercial and government revenue coming in. In the first quarter, government-related revenue made up 55% of total revenue, while commercial revenue made up 45%. Commercial revenue grew 33% year over year, while government revenue increased 45%.
Can the tremendous growth and potential justify the nosebleed valuation?
Palantir's data platform and AI solutions do appear to be groundbreaking and have a long runway ahead. But even the best assets have a ceiling. Thus, investors are left with the challenge of trying to understand whether Palantir's great business deserves to trade at 245 times forward earnings.
Palantir is not alone in thinking that the AI revolution is still in the early innings, but the path is not always linear. While there are many differences between what's going on with AI today and the internet boom in the late 1990s, investors will likely recall that before the internet changed everything, there was the dot-com crash.
One way to assess Palantir's valuation is to look at Wall Street's earnings projections for Palantir over the next several years to see if Palantir can grow into this huge valuation. Here are the estimates, according to data from Visible Alpha:
| Year | Net Income | Diluted EPS |
|---|---|---|
| 2025 | $1.49 billion | $0.32 |
| 2026 | $1.93 billion | $0.42 |
| 2027 | $2.64 billion | $0.61 |
| 2028 | $3.57 billion | $0.78 |
| 2029 | $4.70 billion | $0.99 |
| 2030 | $6.18 billion | $1.56 |
Data source: Visible Alpha. EPS = earnings per share.
If true, this would be strong total earnings growth of 388% between 2025 and 2030 and compound annual growth of 37%. Even so, the stock today trades at close to 90 times the 2030 earnings projection.
This still seems extremely high, especially when you consider that investors still lack visibility about what AI and its use cases will look like in five years, what the economy will be doing, and what kind of competition Palantir will be dealing with. Also note that the most earnings growth would come in 2030, a year that analysts likely have the least visibility on.
My style of investing avoids stocks trading at these kinds of huge valuations, but that doesn't mean you can't invest if you're a true believer that AI will radically change the world as we know it, and you assume that Palantir is able to maintain its market-leading position in the AI data decision-making space. However, if you do invest I would suggest dollar-cost averaging, so you can smooth out your cost basis over time.
