Palantir (NASDAQ: PLTR), a provider of data mining and analytics services, went public via a direct listing on Sept. 30, 2020. Its stock opened at $10 on the first day and soared to $39 during the meme stock rally on Jan. 27, 2021, but subsequently sank to an all-time low of $6 on Dec. 27. 2022. Like many of its peers, Palantir lost its luster as its growth cooled off and rising interest rates compressed its valuations. It was also a controversial company because it was backed by the CIA's venture capital arm and used by Immigration and Customs Enforcement (ICE) to deport undocumented immigrants.
However, if you had invested $100,000 in Palantir at its all-time low, your investment would be worth a whopping $1.37 million today. Its stock soared to the $80s over the past two years as its sales growth accelerated, its profits surged, and it joined the S&P 500. Could that rally continue and generate more millionaire-making gains over the next few years?
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The key facts about Palantir
Palantir, which was named after the all-seeing stones from The Lord of the Rings, was founded in 2003 in response to the Sept. 11 attacks. Its Gotham platform gathers and crunches data for U.S. government agencies, and it says its ultimate goal is to become the "default operating system for data across the U.S. government." Its Foundry platform serves commercial customers.
Palantir mainly helps these large customers break down the silos between their different departments and computing platforms, gather all of that data into a centralized location, and spot trends to help them make smarter, data-driven decisions.
After its public debut, Palantir initially claimed it could grow its annual revenue by at least 30% annually through 2025. Its revenue rose 47% in 2020 and 41% in 2021 but grew just 24% in 2022 and 17% in 2023. That slowdown -- which it mainly blamed on the uneven timing of government contracts and macro headwinds for its commercial customers -- spooked the bulls.
But as Palantir's sales growth cooled off, its profits soared as it trimmed its spending and reined in its stock-based compensation expenses. It also turned profitable for the full year in 2023, which led to its inclusion in the S&P 500 this September.
Why is the market so bullish on Palantir?
Two main catalysts are driving Palantir's stock higher. First, it expects its revenue to rise 26% in 2024. It attributes that reacceleration to the robust growth of its U.S. commercial business, new government contracts, and the rollout of new generative artificial intelligence (AI) services for streamlining its data mining services.
Second, its margins are expanding, and its profits are soaring. In the first nine months of 2024, its adjusted operating margin rose year over year from 26% to 37%. Its adjusted free cash flow (FCF) margin rose from 26% to 36%, and its net income more than tripled on a generally accepted accounting principles (GAAP) basis. It expects to remain firmly profitable on a GAAP basis for the foreseeable future.
From 2023 to 2026, analysts expect Palantir's revenue to grow at a compound annual growth rate (CAGR) of 24% as its GAAP earnings per share (EPS) rises at a CAGR of 59%. That growth could be driven by the ongoing geopolitical conflicts (which should generate tailwinds for Gotham) and the secular expansion of the big data and AI markets.
Why should investors be wary of chasing its high-flying stock?
Palantir is still growing rapidly, but it's also priced for perfection at more than 160 times its forward earnings and 50 times next year's sales. The bulls believe its early mover advantage in the data aggregation space, the stickiness of its government contracts, and the rapid growth of its U.S. commercial business justify those high valuations. Expectations for lower interest rates are also drawing back more speculative investors.
But it also isn't hard to find other high-growth digital transformation companies that are trading at much more reasonable valuations. ServiceNow(NYSE: NOW), the digital workflow services leader, which is expected to grow its top line by at least 20% for the next few years, trades at 67 times forward earnings and 18 times next year's sales.
That might be why Palantir's insiders still sold more than twice as many shares as they bought over the past 12 months. Its CEO, Alex Karp, has also been consistently selling his shares through a Rule 10b5-1 plan (which automatically sells the stock when certain criteria are met) over the past four years, but that isn't too surprising since most of his salary consists of stock-based compensation instead of cash.
Could it turn $100,000 into $1 million again?
Palantir might eventually turn a fresh $100,000 investment into $1 million again, but it will probably take a lot longer than two years this time around. At these valuations, Palantir's stock could easily be cut in half and still be considered pricey relative to its growth potential -- so investors should gradually accumulate it instead of expecting it to be a quick millionaire-maker.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies and ServiceNow. The Motley Fool has a disclosure policy.
