Palantir Technologies (PLTR -2.14%) has become something of an enigma in recent years. The company is at the forefront of the artificial intelligence (AI) revolution. It originally developed its AI-powered data mining tools in the wake of the 9/11 terrorist attacks, with the idea that information buried deep in various intelligence databases could be combined to root out and stop terrorist attacks.
Its process developed such useful insights that Palantir expanded beyond its original mandate, using these sophisticated algorithms to help business leaders make data-driven decisions. By aggregating information from current and legacy software systems under a single dashboard, Palantir's Artificial Intelligence Platform (AIP) can provide clear analysis and actionable intelligence, saving businesses time and money.
That unbridled success has translated into meteoric growth and a blistering run for the stock. But this could be just the beginning. CEO Alex Karp just announced plans to grow the company's revenue tenfold while reducing Palantir's head count.
Let's review what he said and see what this could mean for the stock price.
Image source: Getty Images.
Accelerating growth
Alex Karp is no stranger to controversy, so it isn't a surprise that he would make what some might consider an outlandish claim. In an interview with Morgan Brennan on CNBC on August 5, he turned heads when he remarked, "We're planning to grow our revenue ... while decreasing our number of people. This is a crazy, efficient revolution. The goal is to get 10x revenue and have 3,600 people. We now have 4,100."
It's important to give Karp's comments some context. When he talks about the "crazy, efficient revolution," he's no doubt referring to the productivity gains made possible by generative AI. He seems to suggest that those efficiency gains will allow Palantir to multiply its sales by 10 with slightly fewer employees.
In Q2, Palantir generated revenue that had increased 48% year-over-year to $1 billion. This marked the eighth consecutive quarter of accelerating revenue and the first time in the company's history that it surpassed $1 billion in quarterly revenue. At the same time, adjusted earnings per share (EPS) of $0.16 surged 78%.
The results were driven by its U.S. commercial segment (which includes AIP), which grew 93% year over year and 20% quarter over quarter to $306 million, representing nearly 31% of revenue. Not bad for a product that debuted just over two years ago.
Palantir clearly believes its growth streak has room to run, as management increased its guidance for the coming quarter. The company's forecast is calling for revenue of $4.146 billion at the midpoint of its guidance (increased from $3.895 billion), which would amount to growth of 44%. Palantir also increased its outlook for U.S. commercial revenue growth, guiding for an increase of at least 85%.
It's also worth noting that Palantir's Rule of 40 score, a key metric that views revenue in the context of profitability, soared to 94% during Q2. Any number above 40% is considered a success, so Palantir's score is outrageously good.
With that as a backdrop, let's see how long it could take for Palantir to grow its revenue by 10x (in a perfect world) and what it would mean for the stock price.
Achievable or just plain hubristic?
At first glance, Karp's pronouncement might seem like sheer hubris, but running the numbers reveals that, given the company's current trajectory, Palantir could actually achieve this lofty goal sooner than later -- but plenty of things will have to go right.
Palantir currently sports a market cap of $429.44 billion (as of this writing). Wall Street is forecasting revenue of $4.16 billion this fiscal year, which gives the company a forward price-to-sales (P/S) ratio of 103 (not a typo). Wall Street is forecasting revenue growth of roughly 39% annually over the coming five years. From here, we'll have to make a few big assumptions:
- The P/S remains constant
- There are no stock splits
- The outstanding share count remains the same
- Palantir can maintain year-over-year revenue growth of 39% (or more)
Assuming these factors, Palantir could grow its revenue to $41.6 billion annually by mid-2033. If that happened, its market cap would be in the neighborhood of $4.3 trillion, resulting in a share price of $1,891, or share price gains of 945%, or a 10-bagger.
All the usual disclaimers
To be clear, this is all fun with numbers, and a lot would have to go right for Palantir to reach this goal, especially by 2033. It would have to execute flawlessly for the next eight years.
Any combination of slowing growth, multiple compression, stock market corrections, bear markets, or black swan events could throw a wrench in the works, slowing or reversing Palantir's relentless march higher.
What's more likely to occur is that Palantir will experience years of fluctuating revenue growth, its multiple will decrease, and the stock will appreciate tenfold sometime over the next decade or two. But there are simply no guarantees.
Lest there be any doubt, I'm a Palantir bull and believe the company has accomplished amazing things and will continue to do even more. I simply think the thought exercise I've laid out above is a bit ambitious.
The good news for those planning to hold Palantir for the next decade is that the future looks bright, and the stock price will likely be much higher 10 years from now.
