Want to make boatloads of money? Bet on the right stock at the right time. Palantir Technologies (PLTR -4.09%) is an excellent example of how this can work. A $10,000 investment made when the company went public in late 2020 would be worth $146,000 today -- a return of 1,270% compared to the S&P 500's return of 84% over the same time frame.
That said, past performance is no guarantee of future performance. And Palantir's rocket ship rally made its shares uncomfortably expensive compared to market averages. Let's dig deeper to see if the data analytics and artificial intelligence (AI) leader is still capable of multibagger long-term returns.
A unique take on data analytics and AI
Since its founding in 2003, Palantir focused on providing software to help public- and private-sector clients identify trends, detect fraud, and optimize their operations through big data analytics. Investors became particularly excited about the stock after it began incorporating generative AI-related functionality into its offerings, allowing it to deliver real-time insights in situations like battlefields or law enforcement.
More importantly, AI-related demand seems to be having a significant impact on the company's operations. First-quarter earnings were excellent, with revenue jumping 39% year over year to $883.9 million, while profits more than doubled to $217.7 million.
However, investors should note that much of this growth came from Palantir's commercial segment, where it sells software to private enterprises instead of the government. While this likely represents a larger market opportunity, its economic moat against rivals is shallower.
In the private sector, Palantir is less able to leverage its trust, political connections, and security clearances to compete. And it will face stiff competition from rivals like Microsoft and Amazon, which offer similar data analytics software and services. These companies are also much more vertically integrated than Palantir because they also operate robust in-house cloud computing services, while Palantir is more reliant on third-party infrastructure.
Is Palantir a millionaire-maker stock?
In order to turn a $10,000 initial investment into $1 million, Palantir will have to grow by a further 585% from its current price. On the surface, seems looks easy for a stock that has enjoyed a compound annual growth rate (CAGR) of almost 74% since hitting the market less than five years ago. However, things are very different now. The larger a company becomes, the harder it becomes to grow. Customers become harder to find, and bigger contracts are needed to move the needle.
Image source: Getty Images.
A 585% increase in Palantir's stock price would give the company a market cap of $2.33 trillion, making it the fifth-largest company in the U.S. behind Amazon. While this is technically possible over the long term, it is unclear if Palantir's addressable market can support this much expansion. Other tech giants like Amazon, Nvidia, and Microsoft serve much larger opportunities and often boast higher levels of diversification.
For example, while Palantir has a niche focus on data analytics, Microsoft's competing platform, Fabric, likely only represents a small part of its $245.1 billion software empire.
Palantir's earnings and revenue also haven't kept up with its stock price growth, leading to an incredibly high price-to-earnings (P/E) ratio of 627 compared to the S&P 500 average of 29. This inflated valuation suggests there isn't much room for fundamentals-led growth. Palantir investors should consider taking profits before there is a correction in the stock.
