Palantir’s stock had a strong run-up in 2024.
Palantir (PLTR 1.23%) has had a phenomenal 2024, rising 66% so far this year. Performance like that only comes when a business excels, and that’s exactly what Palantir is doing. However, stocks sometimes run up in anticipation of these strong business gains, and many investors might be worried they’ve already missed the boat.
So, is this just the beginning for Palantir? Or has it already peaked?
Palantir’s software is a massive step for AI integration
With such a strong year-to-date performance, it’s likely no surprise that Palantir is involved with artificial intelligence (AI). AI has been all the investing rage over the past year and a half, but for a good reason. With the rise of generative AI models, the technology is becoming more viable for the everyday person. This is a key development, as more people are starting to feel comfortable with AI integration.
AI integration is Palantir’s business, and it has been doing that for a long time. It started as a company that sold AI software to governments to help them process mounds of information quickly and give them actionable insights. Eventually, Palantir realized this software also had a strong commercial use case, so it expanded from its original market.
However, that software was a stand-alone product that could be used to make decisions on the side. Palantir’s latest product, Artificial Intelligence Platform (AIP), is a much more integrated platform. AIP allows large language model (LLM) integration, helping the user to utilize generative AI effectively. Developers can then use these building blocks to create custom applications, automate workflows, or build other AI-powered applications for their business.
AIP is a massive step forward for AI and represents the next step in AI integration. Management describes the demand for AIP as “unprecedented” even though a fraction of its customer base is adopting it. Right now, it’s primarily the U.S. commercial customer base that is rapidly deploying this tool. However, that cohort only made up about a quarter of overall revenue companywide.
Palantir has a strong global presence, and its commercial revenue split is nearly perfect between domestic and international sales. However, its government revenue stream still makes up the majority of Palantir’s sales, with it consisting of 53% of total revenue.
Management is confident that AIP will expand internationally and in government, which is a massive growth catalyst that has yet to be realized. But does that justify the stock’s price tag?
Palantir’s stock is far from cheap
Palantir’s stock has risen much faster than its business has grown, so it has become quite expensive on a valuation basis. It’s complicated to choose which valuation metric to use for Palantir. The company is fully profitable but hasn’t achieved normal software company margins yet, but it is improving each quarter. This makes the price-to-earnings (P/E) ratio a bit misleading.
PLTR Profit Margin (Quarterly) data by YCharts
Because of its profitability, the price-to-sales (P/S) ratio isn’t valid either since it’s normally used for companies without profits.
So what should investors do? I think the best way to value Palantir is to project future growth and margin expansion and then apply a typical software company multiple to the stock.
Wall Street analysts project 21% growth in 2024 and 2025, which is a good baseline growth figure. If Palantir can improve its profit margin to 25%, it would enter territory that mature software companies like Adobe achieve. Since Adobe switched to the subscription model, it has traded around 50 times earnings, which is a hefty premium to the market.
Looking out three years, if Palantir maintained its growth, improved its margins, and had that premium, it would be worth $51.7 billion. That may seem like a big company, but the problem is that Palantir is worth $63.6 billion already. So, if Palantir succeeds over the next three years, its stock may go backward.
That shows the high expectations built into Palatnir’s stock right now. However, if these assumptions are wrong, Palantir’s stock may continue rising. Regardless, I think it’s a bit of an extreme valuation, so I will pass on the stock for now.