This AI stock has been on fire in 2024, but can it sustain its impressive rally in the long run?
Investors have been buying Palantir Technologies (PLTR -1.57%) stock hand over fist in 2024, which is evident from the 67% gains clocked by the company that’s known for providing data analysis software platforms to both government and commercial customers. Artificial intelligence (AI) played a central role in Palantir stock’s surge this year as the growing adoption of this technology across the globe led to a nice bump in the company’s revenue pipeline.
But will Palantir be able to sustain its AI-fueled growth in the long run and deliver solid returns to investors over the next five years? Let’s find out.
Palantir Technologies is serving a fast-growing market
Precedence Research estimates the market for AI software could increase at an annual rate of 23% through 2032, generating annual revenue of just over $1 trillion at the end of the forecast period. Palantir reported revenue of $2.3 billion in the trailing 12 months, suggesting it has massive room for growth in the long run. AI has already started moving the needle for Palantir. The company’s revenue in the first quarter of 2024 increased 21% year over year to $634 million.
However, a closer look at certain other metrics indicates that Palantir’s growth is set to accelerate. For instance, Palantir’s commercial revenue increased 27% year over year in the first quarter of 2024 to $299 million, outpacing the growth of its overall revenue. U.S. commercial revenue grew at an even faster pace of 40%.
The stronger growth in Palantir’s commercial revenue can be attributed to the growing adoption of the company’s AI software platforms, which is evident from the remarks made by management on the May earnings conference call: “U.S. commercial is where we’re seeing the greatest transformation. While Q1 is seasonally our slowest quarter, AIP adoption by new and existing customers helped drive notable growth in customer acquisition and revenue in our U.S. commercial business.”
A key reason why customers have been adopting Palantir’s Artificial Intelligence Platform (AIP) software and increasing their usage of it is because of the efficiency gains that they are witnessing. The company points out that its customers “are realizing the extensive possibilities of AIP within their own enterprises and increasing their scope accordingly.”
As a result, there is a solid chance that Palantir’s revenue growth will improve in the future. The company’s remaining deal value stood at $4.1 billion in Q1, an increase of 22% from the prior year. Its remaining performance obligations grew at a faster pace of 39% year over year to $1.3 billion. Both these metrics are indicators of Palantir’s future growth potential.
The remaining deal value is the total remaining value of contracts with Palantir’s customers at the end of a particular period. Meanwhile, remaining performance obligations refer to “the total values of contracts that have been entered into with, or awarded by, our customers, and represent non-cancelable contracted revenue that has not yet been recognized.”
As these metrics increased at a healthier pace than Palantir’s revenue in Q1, there is a good chance that its top-line growth will pick up in the future. More importantly, Palantir points out that the strong unit economics of its business is leading to an improvement in its margin profile as well. Its non-GAAP (adjusted) operating margin improved by an impressive 12 percentage points year over year in Q1 to 36%.
More importantly, Palantir expects “the favorable unit economics and higher throughput to continue to accelerate our business,” which probably explains why analysts expect its bottom-line growth to remain solid.
PLTR EPS Estimates for Current Fiscal Year data by YCharts
Terrific earnings growth is expected over the next five years
Analysts expect Palantir’s tremendous earnings growth momentum to continue over the next five years. Its earnings are forecast to increase at an annual rate of 85% in the next five years, and there is a good chance that Palantir could indeed deliver such growth thanks to the huge addressable market it serves and its improving margin profile.
This is also the reason why Palantir stock is undervalued based on the price/earnings-to-growth ratio (PEG ratio), which is a forward-looking valuation metric that takes a company’s potential growth into account. The PEG ratio is calculated by dividing a company’s trailing price-to-earnings ratio by the estimated growth that it could deliver.
PLTR PEG Ratio (Forward) data by YCharts
A PEG ratio of less than 1 means that a stock is undervalued, and Palantir’s multiple is below that number. So, investors looking to buy and hold a growth stock for the next five years can consider buying shares of Palantir as it could deliver healthy gains thanks to catalysts such as AI.
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.