Big data and now AI giant Palantir (NASDAQ:PLTR | NVDA Price Prediction) has been on an incredible tear of late. Shares of the tech giant have surged more than 400% over the past year, and nearly 1,300% over the past five years. This has made many investors who have stuck with the name since its previous pandemic-era surge very wealthy individuals indeed.
Moving forward, the question for many investors has become whether these sorts of returns are even possible heading into the future. After all, Palantir’s market capitalization of roughly $330 billion and its price-earnings ratio above 580-times has made this stock one of the most expensive the market has to offer.
Let’s dive into where Palantir could be headed from here, and if investors have enough of a fundamental case to put more capital to work in a stock that’s starting to look a bit frothy.
Explosive Earnings Growth
I think it’s always important to keep a given company’s valuation multiple in context. Revenue and earnings growth matter, particularly for companies that are either newly-profitable (as is essentially the case when it comes to Palantir), or companies that have maintained an above-average growth rate relative to the market for some time.
Palantir certainly fits into both buckets, having produced profits for at least six consecutive quarters, depending on which metrics you’re using to determine profitability.
But with 36% revenue growth driven by a 71% surge in U.S. commercial revenue in Q1, it’s clear that Palantir’s overall growth trajectory remains robust. Adjusted operating margins also surged to 36% this past quarter, up from 29% during the same quarter a year prior. This means that not only is Palantir producing significantly more revenue, but each dollar the company brings in is more profitable. That’s the kind of trajectory most investors want to see.
With nearly $4 billion in cash available at its disposal, Palantir clearly has the balance sheet strength to continue to grow its core R&D portfolio and keep the growth pipeline growing.
AI Tailwinds Continue
Of course, Palantir’s underlying secular growth tailwind which is propelling a flurry of investment in the name is the proliferation of AI. As a key big data company utilizing a number of new AI capabilities to provide even more prescient (and valuable) insights for its government and commercial clients, Palantir clearly benefits from ever-improving AI capabilities.
With the AI market expected to grow at a 36% clip over the rest of this decade, it’s clear that Palantir’s broad AI applications in both the government and commercial sectors positions the company well to continue to capture market share and grow at a faster clip than its peers.
Investors will want to pay particularly close attention to Palantir’s Artificial Intelligence Platform (AIP), its foundry business, and Gotham platforms. As the company’s modular sales approach expands its customer base (particularly among smaller companies), there’s certainly a strong bull case that can be made to own this stock here.
The Verdict
Palantir is certainly a company with some of the most robust growth catalysts of any in the market right now. On the one hand, I definitely understand why this stock is valued where it is, and its multiple is certainly a reflection of the idea that this AI-driven growth will continue longer than most think.
Of course, I also understand the hesitancy from some investors from putting capital to work in a name that may or may not keep up with industry growth trends over time. Yes, Palantir has secured some very valuable government contracts, and its core business does look solid. As margins expand, there’s reason to believe that this is a potential future cash flow generating machine worth investing in.
But I also think that we could be due for some sort of a pullback, even among the most most promising AI stocks in this market, given the potential macro headwinds ahead. Thus, I’m patiently waiting on the sideline for a pullback on this name right now.
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