Where Will Palantir Stock Be in 3 Years?

With its shares up 84% year to date, Palantir Technologies (NYSE: PLTR) has been having a good run, especially after better-than-expected second-quarter earnings show accelerating growth following the rollout of new generative artificial intelligence (AI) tools. Let's discuss how this opportunity could develop over the next three years and determine if Palantir can grow into its uncomfortably high valuation.

Second-quarter earnings reignite AI optimism

The last few weeks have not been kind to AI companies, especially on the hardware side of the opportunity. Industry leaders like Nvidia , Advanced Micro Devices , and Super Micro Computer have fallen significantly from all-time highs amid concerns that this new technology may be more hype than substance. However, Palantir's impressive second-quarter earnings help make the case for continued investment.

Total revenue increased 27% year over year to $678 million. But while Palantir is mainly known for its government and defense contracting, its smaller U.S. commercial segment may be finally coming into its own, expanding 55% to $159 million to represent just over 20% of the total.

Palantir's commercial business provides software solutions for analyzing and managing big data for the private sector. This segment's rise could have several key benefits over the coming years. Unlike government contracts (which can be inconsistent depending on who is in office or which global conflicts flare up), private sector exposure could add stability and predictability to Palantir's operations. It also demonstrates the value of its recent pivot to generative AI.

The next three years could depend on AI

So far, the AI industry has mainly benefited hardware giants like Nvidia, which produces the computer chips needed to run and train consumer-facing large language models (LLMs). However, the software side of the industry may not be meeting expectations, with some analysts at Goldman Sachs suggesting the massive hardware spending may never pay off. Palantir might help change that narrative over the coming years.

Palantir has integrated generative AI tools with its legacy machine learning and data analytics software to create its Artificial Intelligence Platform (AIP). In battlefield scenarios, the AIP can give operators real-time info about potential threats and targets. However, in the private sector, it can help businesses analyze internal data to gain valuable insights and boost security and operational efficiency.

Image source: Getty Images.

Management has claimed to see "unprecedented" demand for these services. Palantir has closed several AIP-related deals with major companies, including the non-profit senior advocacy group AARP, which will use it to personalize user experiences, and the Japanese electronics conglomerate Panasonic , which will use the platform to optimize its finance, quality control, and manufacturing.

But while the partially CIA-funded Palantir boasts a deep economic moat in government contracting because of its trust, track record, and resilience to bad publicity, it is unclear what differentiates it from its private sector rivals -- especially as competitors like Microsoft and Snowflake also implement AI-related features in their data analytics offerings. Palantir may face rising competition over the next three years, which may limit its explosive private-sector growth rate.

Is Palantir stock a buy?

A potentially weak moat is not Palantir's only challenge. The stock also faces severe overvaluation. With a forward price-to-earnings (P/E) multiple of 91 , shares are unsustainably expensive . For context, the Nasdaq-100 has an average estimate of just 29, and business software giant Microsoft is valued at a P/E of just 32.

While growth stocks can sometimes trade at a premium because investors are optimistic about their prospects, Palantir looks priced for perfection. And there is a major risk that shares can underperform over the next three years, even if the underlying business succeeds.

Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft, Palantir Technologies, and Snowflake. The Motley Fool has a disclosure policy .