Artificial intelligence (AI) has dominated the market to start 2024. Nvidia recently became the most valuable company in the world and is up more than 150% year to date (YTD). Investors are betting that AI is going to be a huge market opportunity as the large technology players spend tens of billions on it.
Palantir Technologies (NYSE: PLTR) is one of these AI companies. Shares are up 40% YTD with accelerating revenue growth as customers adopt its intelligent software and analytics tools. Where will this AI winner land by the end of 2024? Let's take a closer look and find out.
Intelligent software for defense and commercial customers
At its core, Palantir builds custom advanced analytics software. Customers range from the United States military and its allies (U.S. government revenue was more than $250 million last quarter alone) to the private sector. Corporations -- especially larger ones -- utilize Palantir's tools to analyze operations and track how a business is performing.
Recently, Palantir has pushed its artificial intelligence platform (AIP) for its customer base. I'm not going to pretend to be an expert on how these tools actually work, but automated intelligence that provides useful insights can be important for complex organizations.
And it looks like these tools work. Over the last 12 months, Palantir generated $2.33 billion in revenue. It has 554 total customers, 427 of which are commercial organizations (i.e., not government agencies). This is up from just 49 commercial customers at the end of 2020.
Accelerating growth and profitability
Over the last few quarters, Palantir's revenue growth started to accelerate again. This is likely why the stock is up so much this year; investors love an accelerating top line. Last quarter, revenue grew 21% year over year to $634 million, driven by 27% growth in the commercial segment. Back in 2023, revenue growth had sunk to around 12% year over year.
Profitability is shining right now, which is a great sign for the stock. Net income over the last 12 months was $300 million, which is a huge improvement from $500 million to $1 billion annual losses a few years ago. Palantir is proving that it can grow efficiently (meaning while generating a profit), a sign of a healthy software business.
PLTR PS Ratio data by YCharts
Where will it sit at the end of 2024
Palantir is an exciting company. Revenue should continue to grow as more and more organizations embrace AI and software analytics. The stock still looks expensive, though, and I wouldn't buy it in the summer of 2024. Let's run through some numbers to show why.
Today, Palantir has a market cap of $54 billion. That gives the stock a trailing price-to-sales ratio (P/S ) of 24. Remember, this is a sales ratio, not based on profits. With an operating margin of 8%, Palantir does not generate much in earnings for every dollar in sales. Margins are likely to expand over time, but that is not certain.
But even with expanding margins the stock still looks expensive. Assuming Palantir can grow its revenue by 30% a year for five years (an acceleration from current levels), it will generate $8.65 billion in earnings five years from now. At a 30% profit margin, that equates to $2.6 billion in earnings, or a five-year forward price-to-earnings ratio (P/E) of approximately 21.
That is not much lower than the S&P 500 index's long-term P/E level. What this should tell investors is that Palantir stock is already pricing in five years of 30% revenue growth and a profit margin expansion to 30%. These are some high expectations that should keep investors from buying Palantir at the midpoint of 2024.
Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy .
Most Popular
Comments / 0