Palantir Stock: A Millionaire-Maker in the Making?

Palantir Technologies (PLTR), known for its data mining and analytics services, has been a topic of controversy but continues to experience rapid growth. The company made its public debut on September 30, 2020, through a direct listing. On its first day, Palantir's stock opened at $10, before reaching a high of $39 during the meme stock frenzy on January 27, 2021. However, the stock later plummeted to an all-time low of $6 on December 27, 2022. Like many other companies in its sector, Palantir struggled as growth slowed down and rising interest rates affected valuations. Compounding these issues is Palantir's controversial reputation, bolstered by its connections to the CIA and its use by Immigration and Customs Enforcement (ICE) to identify undocumented immigrants.

If an investor had purchased $100,000 worth of Palantir stock at its lowest price, that investment would have grown to an impressive $1.37 million today. Over the last two years, the stock price surged into the $80s as the company accelerated its sales growth, boosted its profits, and became a member of the S&P 500. This raises the question: can this rally continue, leading to even greater financial rewards for investors?

Understanding Palantir

Palantir, named after the all-seeing stones featured in The Lord of the Rings, was established in 2003 in response to the September 11 attacks. Its primary platform, Gotham, is designed to assist U.S. government agencies by collecting and analyzing data. The company aspires to become the main operating system for data management across the U.S. government. Its other platform, Foundry, caters to commercial clients.

The main objective of Palantir is to aid large customers in integrating the various data siloed within their departments and systems, allowing them to make more informed, data-driven decisions by identifying trends.

Upon going public, Palantir expressed ambitious growth expectations, targeting at least 30% annual revenue growth until 2025. Initially, this seemed achievable with revenue increasing by 47% in 2020 and 41% in 2021. However, the growth rate dipped to 24% in 2022 and fell further to 17% in 2023. The company attributed this slowdown to the irregular timing of government contracts and macroeconomic challenges faced by its commercial clients, which created concerns among investors.

Despite the cooling sales growth, Palantir dramatically improved its profitability by cutting expenses and managing its stock-based compensation. The company turned its first profit for the full year in 2023, which was a significant factor in its inclusion in the S&P 500 index this September.

Market Sentiment Toward Palantir

Two primary drivers are contributing to the bullish sentiment surrounding Palantir's stock. First, the company anticipates a revenue increase of 26% in 2024, which is attributed to strong growth in its U.S. commercial operations, new government contracts, and the introduction of innovative generative artificial intelligence (AI) services that enhance its data mining capabilities.

Secondly, Palantir is experiencing expanding profit margins. In the first nine months of 2024, its adjusted operating margin improved from 26% to 37% year over year. Furthermore, its adjusted free cash flow (FCF) margin increased from 26% to 36%, while its net income more than tripled on a generally accepted accounting principles (GAAP) basis. The company projects to maintain a solid profit on a GAAP basis for the foreseeable future.

Analysts forecast that from 2023 to 2026, Palantir's revenue will grow at a compound annual growth rate (CAGR) of 24%, and GAAP earnings per share (EPS) is expected to rise at a CAGR of 59%. This growth can be influenced by ongoing geopolitical tensions, which may benefit the Gotham platform, as well as the continuous expansion of the big data and AI sectors.

Considerations for Potential Investors

While Palantir is indeed expanding quickly, it's worth noting that the stock is priced for perfection, trading at over 160 times its forward earnings and around 50 times next year's sales. Some investors believe that Palantir's early market advantage, the long-term contracts it holds with the government, and the rapid growth of its commercial segment justify these hefty valuations. The recent expectation for lower interest rates has also attracted more speculative investments in the market.

However, there exist numerous high-growth digital transformation companies with more appealing valuations. For example, ServiceNow, a leader in digital workflow services, is projected to achieve at least 20% annual revenue growth but trades at 67 times forward earnings and 18 times next year's sales.

The high valuations could be a reason behind Palantir insiders selling more than twice as many shares as they've purchased in the past year. Additionally, CEO Alex Karp has consistently sold his shares through a Rule 10b5-1 plan over the past four years, although this is not unexpected given that his overall compensation package includes significant stock-based compensation.

Future Prospects for Investors

Palantir could potentially transform a new investment of $100,000 into $1 million once again. However, achieving that kind of return is likely to take longer than the previous two-year timeline. Given the current valuations, Palantir's stock could easily see a reduction by half yet still be considered expensive relative to its growth prospects. This indicates that investors should consider a gradual accumulation strategy rather than anticipating rapid millionaire-making returns.

Palantir, Stock, Investment