Where will Palantir Technologies be in three years?

Palantir Technologies (PLTR 1.43%) Shares of the company, which went public in September 2020 and has made a name for itself by providing analytics and software platforms to federal government agencies, have surged a whopping 608% since the time of writing.

The stock completely outperformed its 61% gain. NASDAQ-100 Technology Sector However, it’s worth noting that Palantir’s hot rally only gained momentum in April 2023, after the company announced its entry into the artificial intelligence (AI) software market.

More specifically, Palantir announced the launch of its Artificial Intelligence Platform (AIP) on April 27, 2023. Since then, the stock has soared like a rocket, reaching a gain of 760% as of this writing. This hot rally has been driven by the enormous growth potential of the generative AI software market, which Palantir is seeking to leverage with this product platform.

But the question is whether Palantir has enough fuel on its sleeve to deliver even more profits to investors over the next three years, given the high valuation it is currently trading at.

AIP accelerated Palantir’s growth.

To understand how AIP will impact Palantir’s business, let’s first look at what the company was doing before entering the AI ​​software platform space. Palantir launched AIP in the second quarter of 2023, so let’s take a look at its performance in the first quarter of that year.

In the first quarter of 2023, the company’s revenue increased 18% year-over-year to $525 million. Palantir reported that commercial revenue increased 15% in the quarter, while government revenue increased 20%. It’s also worth noting that Palantir’s revenue pipeline wasn’t growing robustly at the time. This was evident in the company’s remaining transaction value of $3.4 billion in the first quarter of 2023, down from $3.5 billion in the same period last year.

Palantir notes that residual transaction value is “the total residual value of the contract and includes existing contractual obligations and unexercised contract options available to that customer.” Improvements in this metric therefore ideally boast a healthy revenue pipeline, which Palantir was unable to build at the time.

Today, the rapid adoption of AIP is starting to bear fruit for Palantir. Third quarter 2024 revenue increased 30% year-over-year to $726 million. The commercial business is starting to contribute to Palantir in a more meaningful way, with revenue in this segment growing 27% year-over-year during the quarter. Our government business also saw good growth, reaching $408 million, up 33% year-on-year, indicating solid demand for AIP among government customers.

Meanwhile, Palantir’s revenue pipeline is also starting to improve, with its remaining deal value reaching $4.5 billion, up 22% year-over-year. The growth in this metric can be attributed to Palantir customers signing larger contracts with the company since the introduction of AIP. Palantir, for example, closed 64 deals worth more than $1 million in the first quarter of 2023. This number rose to 104 in the third quarter of 2024.

Management clearly pointed out that AIP is playing an important role in attracting more customers and encouraging customers to spend more on AIP products. In a November earnings conference call, CFO Dave Glazer said AIP is “driving both new customer conversions and existing customer expansion.”

The good thing is that the market for AI software platforms that Palantir is targeting with AIP is currently in its early growth stages. Market research firm IDC expects the market to generate $153 billion in revenue by 2028, compared to $27.9 billion in 2023. The company expects its AI software platform to grow at a rate close to 41% per year over these five years.

As a result, don’t be surprised to see Palantir’s end markets expand rapidly, allowing the company to attract more customers and capture a larger share of their wallets, considering it’s one of the top providers of AI software platforms.

Palantir could be a much bigger company in three years.

According to IDC, the AI ​​software platform market generated revenue of $27.9 billion in 2023. Palantir ended the year with total sales of $2.23 billion. Of course, Palantir’s AI business was only in its very early stages after launching AIP in April 2023, but the fact that IDC ranked Palantir as the No. 1 vendor in the AI ​​software platform category in both market share and revenue in 2021 is significant. It’s noteworthy.

So Palantir was already in the AI ​​game before the technology took off, following the launch of ChatGPT in November 2022. This is not surprising, as CEO Alex Karp wrote at the time of AIP’s launch that the platform “combines the machine learning technologies we have developed.” “For customers in the commercial and government sectors, as well as industrial and military partners, with modern, large-scale language models that are gaining public attention recently.”

Assuming that all of Palantir’s 2023 revenue is tied to sales of AI-related software, Palantir’s share of the AI ​​software platform market at that time would have reached 8%. Now that the company’s growth is accelerating and the overall AI software platform market is expected to grow at a breakneck pace through 2028, Palantir looks set to achieve impressive growth.

Assuming the company grows its share of the AI ​​software platform market to 10% in 2028, its annual revenue could exceed $15 billion (considering that the market size is expected to reach $153 billion in 2028). This implies an annual growth rate of approximately 40%, based on the $2.8 billion in revenue the company is expected to generate in 2024.

Palantir’s current price-to-sales ratio is 63, which is significantly higher than its five-year average sales multiple of 16. The potential for Palantir’s growth to accelerate over the next three years suggests that its valuation may be justified. But even if it trades at its five-year average revenue multiple, Palantir’s market capitalization could reach $240 billion in 2028 (based on the $15 billion in annual revenue estimated in the previous paragraph).

This represents a potential upside of 57% from current levels over the next five years. But don’t be surprised to learn that these AI stocks could see bigger gains if they capture a larger share of the AI ​​software platform market.