Palantir Technologies (NYSE: PLTR) saw a sharp 52% jump in its stock price so far in 2024. A big reason for that surge is the growing demand for the company’s Artificial Intelligence Platform, which is now driving healthy growth in its commercial business. At the same time, Palantir made its name as a supplier of software platforms to government agencies in the U.S. and other countries, but growth on that side of the business has slowed over the past year.
Palantir’s government-related revenue increased 14% in 2023 to $1.2 billion. Its commercial business recorded 20% growth last year. Taken together, overall revenue rose by 17% in 2023 to $2.23 billion. But is this growth enough to help Palantir justify its current expensive valuation? Can it keep delivering healthy growth for the next five years?
Palantir’s government business gets an AI-related boost
The good news for Palantir is that the growing adoption of artificial intelligence (AI) by government agencies could give that side of its business a shot in the arm. Palantir stock surged impressively this month after it revealed that the U.S. Army had awarded it a $178.4 million contract to develop prototypes of Tactical Intelligence Targeting Access Node (TITAN) — AI-powered ground stations that “provide actionable targeting information for enhanced mission command and long range precision fires.”
Palantir management pointed out that this contract “demonstrates the Army’s leadership in acquiring and fielding the emerging technologies needed to bolster U.S. defense in this era of software-defined warfare.” It is worth noting that this isn’t the only AI-related work Palantir is doing for the U.S. Army. The company won a $250 million contract in October “to test, utilize, and scale artificial intelligence (AI) and machine learning (ML) capabilities” for the intelligence community, armed services, and special forces.
Before that, in June, the U.S. Special Operations Command (USSOCOM) awarded Palantir a multiyear contract worth $463 million, which included the deployment of large language models and edge AI capabilities. Given that the adoption of AI in military operations could generate an annual revenue of $32 billion in 2027, it won’t be surprising to see Palantir’s government business getting significantly bigger in the coming years.
When combined with the impressive growth of its commercial business, the company’s overall growth could accelerate over the next five years. According to a forecast by analysts at Market Research Future, the AI software platforms market will grow at a robust annualized rate of 31% through 2030 to a massive $279 billion.
Palantir has started capitalizing on this opportunity. Its commercial revenue in the fourth quarter of 2023 increased an impressive 32% year over year, substantially outpacing the company’s annual revenue growth in this segment. Even better, the number of U.S.-specific commercial deals with contract values of at least $1 million more than doubled in the previous quarter. At the same time, Palantir’s customer spending ticked up, with its U.S. commercial business witnessing a 107% year-over-year increase in total contract value.
More importantly, Palantir’s smart go-to-market strategy in the commercial AI software market should ideally help it capture a bigger share of this space and sustain its solid growth over the next five years.
Impressive potential share price gains
Considering the points discussed above, it is not surprising to see that analysts expect Palantir to clock annualized earnings growth of 85% over the next five years. If that prediction is borne out, its earnings could rise from 2023’s $0.25 per share to $5.42 per share after five years.
If we multiply that projected earnings result by the Nasdaq-100‘s current forward earnings multiple of 30 (using the index as a proxy for tech stocks), it suggests a stock price for Palantir at the end of that period of $162. That would be around 6 times its current stock price.
Of course, investors may wonder if it is worth buying Palantir stock right now as it trades at an expensive 290 times trailing earnings.
However, its forward earnings multiple of 79 points toward a big improvement on its bottom line over the next year. The forward earnings multiple for the following year is even lower, suggesting that Palantir is expected to maintain its earnings growth momentum. All this indicates that growth-oriented investors looking to add an AI stock to their portfolios can still consider buying Palantir, as it seems built for robust growth over the next five years.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
Where Will Palantir Technologies Stock Be in 5 Years? was originally published by The Motley Fool
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