Palantir (PLTR +1.45%) has had a blistering run over the past few years, but the gains haven't all been in a straight line for the data analytics and artificial intelligence (AI) specialist. The stock is currently up 2,190% over the past three years, but has lost at least 20% of its value on at least 10 separate occasions. That's not the half of it. Between early 2021 and early 2023, Palantir plunged more than 80% -- which helps illustrate why it isn't for the faint of heart.
To say the valuation is lofty is an understatement, as the stock currently trades for a whopping 388 times earnings and 116 times next year's expected earnings as of this writing. Yet one Wall Street analyst believes Palantir has broken the mold and could continue to climb.
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Citi says Palantir is a buy
Citi analyst Tyler Radke turned heads recently, maintaining a buy rating and raising his price target to $235 for Palantir stock. This represents potential gains for investors of 42% compared to Tuesday's closing price. The analyst argues that Palantir has "broken" traditional valuation models and the Rule of 40, which is used to judge the quality of earnings for software companies.
Radke cited the company's "vicious growth acceleration and equally impressive margin expansion" as evidence that Palantir is underappreciated, as enterprises flock to its Artificial Intelligence Platform (AIP). "We also see significant tailwinds in the government [segment], driven by accelerating defense budgets and modernization urgency." He went on to suggest that Palantir will benefit from "a ramping defense super cycle," fueling 51% growth for the government segment and total revenue growth of between 70% and 80% in 2026.
I believe the analyst is on to something. In the third quarter, Palantir's revenue grew 63% year over year, but that's just the tip of the iceberg. The U.S. commercial segment -- which includes AIP -- surged 121% year over year and 29% sequentially, and now represents 34% of Palantir's total revenue. AIP has become so successful that government agencies have begun to adopt the platform.
NASDAQ: PLTR
Key Data Points
Perhaps more telling is the company's remaining performance obligation -- contractually obligated sales not yet included in revenue -- which jumped 65% to $2.6 billion. This provides a solid foundation for future revenue growth.
Furthermore, management raised its forecast and is now guiding for full-year revenue to grow 53% to roughly $4.4 billion, while calling for U.S. commercial revenue to grow at least 104% to $1.43 billion.
As I pointed out at the outset, this Palantir stock is not for the faint of heart. For investors with the stomach for a little risk, the prevailing AI tailwinds and defense modernization could represent big catalysts to drive the stock higher over the coming year.
For investors intrigued by the possibilities but concerned about Palantir's egregious valuation, buying a small position can be a way to ease into a stake without taking on too much risk. Moreover, the strategy of dollar-cost averaging is perfect for building a position over time, adding fewer shares when prices are high and more when prices are low.
