Palantir (PLTR 2.39%) is one of the most popular AI stocks on the market. It has delivered shareholders incredible performance, but everyone wants to know if there's room for more. A lofty yet achievable goal for many investors is to find stocks that have the potential to increase in value 10 times over the next decade.
That would be a tall task for Palantir, but is it possible? The answer may surprise you.
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Palantir's AI platform has seen strong growth recently
Palantir develops AI-powered data analytics software that can ingest multiple information streams and generate actionable insights for its users. Additionally, it has tools for clients to make AI agents that can fully or partially automate processes.
Palantir also has a great reputation, as its software has been available for a long time. It started as a government-focused company but has expanded into the commercial sector over the past few years. While government revenue remains a vital part of Palantir's business picture, commercial revenue has also risen to become a substantial part of its business.
The latest demand for its AI software has been unprecedented, according to management, resulting in stellar results. In Q1, revenue rose by 39%, and management also projected a 38% increase in revenue for Q2. Management has a history of beating internal guidance, so the real projected Q2 growth rate is likely somewhat higher than this figure.
However, Palantir's stock price has risen over 700% since the start of 2024, and revenue is only up by 39%. That smells a bit fishy, and investors need to understand what's going on with its current stock price before dreaming about the stock increasing another tenfold.
Palantir's valuation is at dangerous levels
If Palantir's stock increased in value by another 10 times, it would be worth $3.3 trillion, placing it among the largest companies in the world. Although those companies will likely expand in size over the next decade, this remains an incredibly ambitious goal that is unlikely to be achieved.
So what's a realistic expectation?
First, we need to understand how a stock that has only grown revenue by around 40% year over year can increase in value by 700%. While some of Palantir's growth can be attributed to improved financial performance, most of it has resulted from multiple expansion. Multiple expansion occurs when investors are willing to pay more for a stock than they previously did, even if nothing has changed in its financial picture. This is reflected in the stock's valuation, which has skyrocketed over the past year and a half.
PLTR PS Ratio data by YCharts
The stock now trades for more than 110 times sales, which is an unbelievably high valuation. Few stocks ever reach this valuation point and achieve long-term success, let alone considering how relatively slow Palantir's growth is.
Take AI king Nvidia (NASDAQ: NVDA), for example. Throughout its run, it posted multiple quarters where revenue more than tripled year over year. However, it only traded for a maximum valuation of 45 times sales.
NVDA PS Ratio data by YCharts
Palantir is worth more than double that and isn't anywhere close to tripling its revenue year over year. As a result, Palantir's stock has a long way to go to grow into its valuation.
If the stock doesn't come crashing down at some point in the next few years, there are several years' worth of growth already baked into the stock. Most software companies trade between 10 and 20 times their sales, with the best (and most highly valued) companies trading for 30 times sales. It will take Palantir's revenue quadrupling from here to reach those levels, which could take some time at today's growth rates.
As a result, I don't think Palantir can achieve a 10x return in a decade, and it may struggle to outperform the market from here due to extremely high expectations already baked into the stock price.
