Could Palantir's Shares Reach a Trillion-Dollar Value by 2040?
Palantir Technologies: The Controversial Millionaire Maker?
Palantir Technologies, ticker PLTR, has been a buzzword among investors, causing quite a stir with its unusual valuation against its recent revenue growth and the slow growth in its primary government business. The company, renowned for its powerful data-gathering and analytics platform, has found favor with the U.S. government, playing a crucial role in tackling challenging issues like terrorism and the spread of COVID.
More recently, Palantir has rolled out its Artificial Intelligence Platform (AIP) and focused on the commercial market. But, with a market cap of around $47 billion, can this tech giant become a trillion-dollar company within the next 15 years?
Questionable Growth and Sky-High Valuation
The U.S. commercial sector has emerged as a stronghold for Palantir, reporting a 40% surge in year-over-year revenue in the first quarter to $150 million. Palantir has continuously pursued commercial clients with its AIP, delivering workshops and showcasing potential applications in various industries. The company's strategy seems to be working, as its U.S. commercial client base expanded by 19% in the past quarter.
However, government business revenue growth has slowed significantly in recent years. While it boasted a 19% increase in 2022, the pace decelerated to 14% in 2023 and slightly rose to 16% in the first quarter of 2024. Combined, total revenue reached $634.3 million in the first quarter, marking a solid 21% rise.
Despite this growth, there's concern that Palantir won't manage to grow fast enough to justify its current valuation, given its trading price at more than 17 times its forward price-to-sales (P/S) ratio. After accounting for net cash, its enterprise-value-to-sales ratio drops slightly to around 16. For high-margin software companies exhibiting mid-20% growth, a multiple of 7 to 13 would typically be more appropriate in the present market.
A Shot at Trillion Dollar Status?
Translating Palantir's current $47 billion market cap into a trillion-dollar valuation requires a multiplication of more than 20 times. The company is projected to rake in approximately $2.7 billion in revenue this year.
To theoretically become a trillion-dollar company by 2040 with a consistent 20% annual revenue growth, it would generate approximately $50 billion in revenue. With a 10 times multiple on that revenue, the company's valuation would reach around $500 billion — still far short of a trillion.
However, if Palantir can accelerate its annual growth to 25%, its 2040 revenue would reach a remarkable $96 billion, setting the stage for a potential trillion-dollar valuation.
While achieving 25% annual revenue growth for 16 consecutive years isn't a trivial feat, AI's infancy, and Palantir's transformative technology making it a cornerstone of both government and private entities, might just make it possible. Palantir could also cultivate strategic acquisitions to drive additional revenue growth. Back in 2020 and 2021, Palantir saw a remarkable 40% revenue surge. Nevertheless, revenue growth has moderated since, observing yearly increases of just under 24% in 2022 and 17% in 2023.
In light of present revenue growth, the Palantir stock may appear overvalued in the near term. However, if the company can maintain 10 to 20 times growth by 2040, it might merit a bullish outlook. Palantir's cutting-edge technology, yet to fully tap into AI monetization potential, is assuredly a value that can grow significantly with time.
Moreover, Palantir's broad application potential has been demonstrated by companies such as Kinder Morgan, leveraging its technology to predict spikes in natural gas demand, and Airbus utilizing it for optimizing A350 aircraft production without compromising quality.
Though Palantir's stock might appear expensive at the moment, its long-term future is promising.
Investors are questioning whether Palantir's current valuation of $47 billion is justified, given its forward price-to-sales ratio of more than 17 times, which is considered high for high-margin software companies exhibiting mid-20% growth. Despite its recent revenue growth, some believe that Palantir needs to accelerate its annual growth to 25% to potentially reach a trillion-dollar valuation by 2040.
To maximize its chances of becoming a trillion-dollar company, Palantir could explore strategic acquisitions and further tap into the monetization potential of AI, similar to how companies like Kinder Morgan and Airbus have used its technology for their operations.