Palantir (PLTR -9.04%) has already delivered solid returns to patient investors. If you invested $10,000 in the stock at the start of 2024, that investment is already worth $83,000. That's not a bad return for just a year and a half.
But many investors are wondering whether there is room for upside. After all, Palantir has had quite the run over the past few months. To continue turning that initial $10,000 investment into $1 million, Palantir's stock would need to rise by about 1,100% from today's levels. So, is that a feasible goal?
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Palantir's revenue growth is accelerating
Palantir's rise in the stock market can be tied to the general positive sentiment around artificial intelligence (AI). For longer than most, Palantir has offered best-in-class AI tools for its clients, which gives it credibility in the business world. However, it didn't get its start there.
Originally, Palantir's software was intended for use by the government, and the company excelled in this area. Allegedly, it helped track down Osama bin Laden's final hiding place. Eventually, Palantir saw a use case for its software in the commercial world and has also seen strong success there.
Palantir's growth has continued to accelerate due to this unprecedented demand in the AI world, and in particular areas, it's blistering fast.
PLTR Operating Revenue (Quarterly YoY Growth) data by YCharts. YOY = year over year.
Although companywide revenue growth was 39%, U.S. commercial growth increased 71% year over year. The biggest area of weakness is international commercial revenue, which could see a ramp-up once Europe goes all-in on AI like the U.S. has. This could be another positive growth catalyst for Palantir, but is it enough to deliver the 1,100% returns necessary to finish turning the initial $10,000 investment into $1 million?
Palantir's stock is historically expensive
If Palantir were to rise another 1,100%, its market cap would be $3.72 trillion, making it the largest company on Earth. That's pretty unrealistic, especially considering how much smaller Palantir is in terms of revenue and profits.
Unfortunately, when you dig deeper into Palantir's stock, it's clear that the chances for a downward movement are much higher than those of continued growth. Palantir's stock has reached an unbelievably high valuation, and few stocks that reach this level at Palantir's growth rates deliver positive returns for shareholders.
PLTR PS Ratio data by YCharts. PS Ratio = price-to-sales ratio.
At 114 times sales, Palantir's stock is mind-bogglingly expensive. Most software companies trade in the range of 10 to 20 times sales; even the best often don't exceed 30 times sales. Palantir's stock is nearly 4 times that level, yet it isn't growing revenue as rapidly as needed to justify this price tag.
Let's compare Palantir to another AI darling, Nvidia, just to see how expensive the stock is. Nvidia is a great comparison because the two have similar gross margins (Palantir's 80% versus Nvidia's 70%), and Palantir would be thrilled to have a profit margin as large as Nvidia's (52%) one day.
Nvidia also delivered multiple quarters of revenue tripling in 2024, yet it never came close to eclipsing 100 times sales.
PLTR Operating Revenue (Quarterly YoY Growth) data by YCharts. YOY = year over year. PS Ratio = price-to-sales ratio.
Nvidia is growing far more quickly than Palantir and trades for nearly a fifth of the price. The reality is that there is no way to justify Palantir's stock price unless revenue starts to double or triple year over year. We're not even close to that at Palantir's growth rates, so investors should be cautious holding on to Palantir's stock at these levels. There is a risk of an imminent correction, and investors must be aware of the risks associated with holding on to Palantir's stock.
