Palantir Technologies (NYSE:PLTR) The company’s stock soared 110% last year as investors snapped up shares of the software platform provider in droves, thanks to growing demand for its artificial intelligence (AI) offerings. And yet, with the stock already up so far, Wall Street isn’t expecting any further gains in the year ahead.
Palantir shares have an average 12-month price target of $28 (according to the 24 analysts covering the stock). That implies an 11% downside from its current price. One-third of those analysts recommend selling Palantir, 38% rate it as a buy, and the remainder rate it as a hold.
Does this divided sentiment from analysts mean it’s time for investors to take profits in Palantir? Or can this surging AI stock sustain the rally and generate more gains in the year ahead? Let’s see if Palantir has what it takes to defy Wall Street expectations.
Palantir’s growth profile continues to improve
Palantir’s lofty valuation appears to be one of the main reasons analysts doubt it can deliver further upside over the next 12 months. The stock’s price-to-sales ratio of 29 is certainly expensive. It’s almost four times the U.S. tech sector index’s average sales multiple of 7.7. Palantir’s price-to-earnings ratio is also very expensive at 178. Its forward earnings multiple of 86 points to a nice increase in earnings over the next year, but it’s still expensive.
One way to justify buying Palantir stock despite its high valuation is the company’s accelerating growth. In the second quarter, the company’s revenue rose 27% from the same period a year ago to $678 million. That was better than the 21% year-over-year growth Palantir reported in the first quarter of the year. The company’s revenue growth in the first half of the year indicates it is on track to outperform the 17% full-year revenue increase it posted in 2023 to $2.2 billion.
The company expects to close 2024 with nearly $2.75 billion in revenue, which would be a 25% increase from last year. Analysts expect its earnings to rise 44% in 2024 to $0.36 per share, but it should be noted that analysts have been raising their expectations lately.
Stronger-than-expected growth could push Palantir shares higher
Another thing worth noting in the chart is that despite an increase in Palantir’s revenue estimates for the coming years, analysts expect it to grow at a slower pace in 2025 and 2026. However, that may not be the case, as the company’s recent acceleration in growth looks sustainable in the coming year.
In simpler terms, Palantir’s revenue growth could be much stronger than analysts expect in 2025. This is because its Artificial Intelligence Platform (AIP) is generating solid growth across its revenue pipeline. The company’s remaining performance obligations (RPO) increased 41% year-over-year in the second quarter to $1.37 billion.
Palantir’s RPO reflects the value of the contracts the company has signed with its customers, meaning it’s an indicator of its future revenue growth. However, Palantir notes that its RPO consists primarily of commercial contracts. Remaining deal value (RDV) is the metric to look at to get a sense of the potential revenue growth Palantir could deliver. RDV is the total remaining value of all of the company’s contracts at the end of a quarter. This metric was worth $4.3 billion in the second quarter, up 26% from the same quarter last year. It remains to be seen how quickly Palantir can translate those contracts into actual revenue, but it’s worth noting that its RDV is significantly higher than its trailing-12-month revenue of $2.5 billion.
Therefore, there is a strong possibility that Palantir’s growth will be better than expected in the coming year, especially considering that it could continue to attract new customers towards its AI software offerings in view of the huge end-market opportunity available in this market. Market research firm IDC forecasts that the market for AI software platforms offered by Palantir could register a compound annual growth rate of 41% through 2028, generating $153 billion in annual revenue by the end of the forecast period.
Palantir is in a strong position to take full advantage of this opportunity. According to the research firm ForesterPalantir has been ranked as the number one provider of AI software platforms. This is also evident from the fact that the company’s number of deals has been rapidly increasing. For example, it closed 123 deals with US commercial customers in the second quarter, which was a 98% increase over the same period last year.
More importantly, Palantir’s deal volumes are increasing: The company closed 96 deals worth $1 million or more in the previous quarter, up from 66 such deals in the same period last year. In addition, the number of deals worth more than $10 million increased 50% year over year to 27. So as adoption of Palantir’s AI platforms increases, its growth rate should also increase.
Additionally, Palantir’s price/earnings/growth ratio (PEG ratio) is well below 1.
The PEG ratio is a forward-looking valuation metric that is calculated by dividing a company’s price/earnings by its projected earnings growth. A reading below 1 means that a stock is undervalued in view of its potential growth. Therefore, growth investors may still consider buying Palantir stock as there is a good chance that its better-than-expected performance in the coming year could be rewarded with further gains in the market.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in Palantir Technologies and recommends it. The Motley Fool has a disclosure policy.
Where will Palantir Technologies stock be in a year? was originally published by The Motley Fool