Palantir Technologies(NASDAQ:PLTR) The stunning 372% share price rise through 2024 has made the stock extremely expensive, which explains why investors may be wary of buying this high-flying artificial intelligence (AI) software specialist at the moment.
Wall Street expects Palantir’s stock to decline over the next year, as evidenced by its 12-month average price target of $39, which indicates a 48% decline from current levels. According to 22 analysts covering Palantir, this average price target suggests the stock may have gotten ahead, which isn’t surprising when we look at valuation multiples.
After all, a price-to-earnings ratio of 399 and a sales multiple of 72 tell us that investors will have to pay significantly rich multiples to buy this AI stock. The technology-laden Nasdaq-100 the index, on the other hand, trades at 32 times earnings. However, there are a number of reasons why Palantir may be worth buying outright, despite its expensive valuation.
Palantir’s growth has accelerated in recent quarters thanks to rapidly growing demand for the company’s Artificial Intelligence Platform (AIP), which allows governments and organizations to integrate generative AI into their operations. It’s worth noting that this platform was ranked last year by market research firm Forrester as the best AI/ML (machine learning) platform, ahead of established names like Microsoft, AmazonAnd IBMamong others.
However, this wasn’t the only time Palantir has been among the top AI software platform providers. In September 2024, Dresner Advisory Services gave Palantir the highest rating in usability and analytical features and functions in its AI, Data Science and Machine Learning market study. Meanwhile, market research firm IDC ranked Palantir #1 in the AI ​​software platform market in 2021.
IDC points out that the AI ​​software platform market was estimated to be worth $14.2 billion in 2021 and grew by almost 37% that year. Palantir’s 2021 revenue was $1.54 billion, up 41% for the year. However, Palantir generated the majority of its 2021 revenue from selling software platforms and analytics solutions to government customers.
It’s only in recent quarters that the company’s AI business has taken off, evidenced by the rapid growth of the company’s commercial customer base. For example, in 2021, Palantir’s commercial revenues rose 34% to $645 million, compared to the 47% growth in government revenues, which were $897 million.
Looking at Palantir’s latest results for Q3 2024, the number of commercial customers increased by an impressive 51% year over year to 498. Considering that Palantir had a total of 629 customers at the end of the quarter, it can be assumed that the company ended the quarter with 131 government customers, compared to 123 in the same quarter a year ago.
This huge jump in the commercial customer base is the result of the rapid adoption of Palantir’s AIP, which has seen robust demand in recent quarters thanks to the company’s aggressive go-to-market strategy of running “boot camps.” Not surprisingly, Palantir now expects to report at least 50% growth in its US commercial business to $687 million by 2024. That indicates a solid jump from 36% growth in 2023 to $457 million.
This stellar adoption of Palantir’s AIP should allow it to remain one of the top players in the AI ​​software platform market in the long term, and that should prove to be a solid tailwind for the company. That’s because the size of the AI ​​software platform market is expected to reach $153 billion by 2028, according to IDC. Given that Palantir is rapidly building a large base of commercial customers, it should be able to make the most of this enormous opportunity and continue to deliver stronger sales and revenue growth in the coming years.
Palantir’s revenues are growing faster than revenues. In the third quarter of 2024, the company’s adjusted earnings rose 43% year over year to $0.10 per share, compared to the 30% increase in revenue to $726 million. This faster operating income growth can be attributed to the company’s ability to first acquire a new customer and then expand its business with those customers.
Palantir management provided a few examples of this during the November earnings conference call:
To highlight a few notable deal cycles: a major US equipment rental company expanded its partnership with us less than eight months after converting to an enterprise agreement, increasing the ARR on the account tenfold; a bottled water manufacturer, a specialty pharmaceutical company and an agricultural software provider all signed ACV less than two months after their first seven-figure bootcamp deals.
This is a trend that is likely to continue thanks to the continued growth of the AI ​​software platform market and Palantir’s AIP offering, which is considered superior compared to industry peers. As a result, Palantir should continue to benefit from favorable unit economics as its land-and-expand strategy should allow it to generate more profit from each customer.
The effects of the favorable unit economics are already visible on Palantir’s margin profile. The company reported an adjusted operating margin of 38% in the third quarter of 2024, compared to 29% in the same period last year. This figure could go higher in the future and boost Palantir’s earnings growth, as it has been rapidly adding new commercial customers recently, and those customers could strengthen their relationships with the company to deploy generative AI solutions .
Therefore, it would be wise to look past Palantir’s valuation. The company is expected to post a 52% increase in earnings to $0.38 per share in 2024. Estimates for 2025 and 2026 have been significantly higher in recent months, a trend that could continue as the discussion above shows.
Investors looking to add a growth stock to their portfolio would therefore do well to look at the bigger picture rather than just the valuation as the multi-billion dollar opportunity in AI software platforms, Palantir’s robust position in this market and the efforts of the company to make the most of this space, it can remain a top AI stock in the long term.
Consider the following before purchasing shares in Palantir Technologies:
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Amazon, Microsoft, and Palantir Technologies. The Motley Fool recommends International Business Machines and recommends the following options: long calls for $395 in January 2026 at Microsoft and short calls in January 2026 for $405 at Microsoft. The Motley Fool has a disclosure policy.
2 Reasons to Buy Palantir Stock Like There’s No Tomorrow was originally published by The Motley Fool