Palantir Applied sciences (PLTR 1.43%) went public in September 2020, and shares of the corporate that made its title by offering analytics and software program platforms to federal authorities businesses have shot up a outstanding 608% since then as of this writing.
The inventory has comprehensively crushed the 61% good points clocked by the Nasdaq-100 Know-how Sector index over the identical interval, although it’s value noting that Palantir’s red-hot rally gained momentum solely from April 2023 after the corporate introduced its arrival into the synthetic intelligence (AI) software program market.
Extra particularly, Palantir introduced the launch of its Synthetic Intelligence Platform (AIP) on April 27, 2023. The inventory has soared like a rocket since then, logging good points of 760% as of this writing. This red-hot rally has been pushed by the huge development potential of the generative AI software program market that Palantir is trying to faucet with this product platform.
However the query is, does Palantir have sufficient gasoline within the tank to ship extra good points to buyers over the following three years contemplating the costly valuation it’s buying and selling at proper now?
AIP has supercharged Palantir’s development
To grasp the influence of AIP on Palantir’s enterprise, we are going to first check out how the corporate was performing earlier than its foray into the AI software program platforms house. Palantir launched AIP within the second quarter of 2023, so I am going to look at its first-quarter outcomes for that yr.
The corporate’s income in Q1 2023 was up 18% yr over yr to $525 million. Palantir reported a rise of 15% in its industrial income for that quarter, whereas the expansion in its authorities income was 20%. Additionally it is value noting that Palantir’s income pipeline wasn’t rising solidly at the moment. This was evident from the corporate’s remaining deal worth of $3.4 billion in Q1 2023, which was down from $3.5 billion within the year-ago interval.
Palantir factors out that the remaining deal worth is the “whole remaining worth of contracts and contains current contractual obligations and unexercised contract choices obtainable to these clients.” So, an enchancment on this metric ideally boasts of a wholesome income pipeline, which Palantir was unable to construct at the moment.
Reduce to the current, and the speedy adoption of AIP has began bearing fruit for Palantir. Its income within the third quarter of 2024 elevated 30% yr over yr to $726 million. The industrial enterprise has began contributing in a extra significant approach for Palantir as this section’s income jumped 27% yr over yr through the quarter. The federal government enterprise has additionally acquired a pleasant increase because it jumped 33% yr over yr to $408 million, pointing to the stable demand for its AIP amongst authorities clients.
In the meantime, the income pipeline has additionally began enhancing as Palantir’s remaining deal worth elevated by 22% yr over yr to $4.5 billion. The expansion on this metric will be attributed to Palantir clients signing greater offers with the corporate following the introduction of AIP. For instance, Palantir signed 64 offers value $1 million or extra within the first quarter of 2023. That quantity swelled to 104 within the third quarter of 2024.
Administration has clearly identified that AIP is enjoying a major function in serving to it land extra clients and encourage them to spend extra on its choices. On its November earnings convention name, CFO Dave Glazer remarked that AIP is “driving each new buyer conversions and current buyer expansions.”
The great half is that the AI software program platforms market that Palantir is concentrating on with AIP is at present in its early phases of development. Market analysis agency IDC is anticipating this market to generate $153 billion in income in 2028 in comparison with simply $27.9 billion in 2023. The agency expects AI software program platforms to develop at an annual price of near 41% throughout this five-year interval.
Consequently, do not be shocked to see Palantir’s finish market develop quickly, thereby permitting the corporate to land extra clients and likewise win an even bigger share of their wallets contemplating that it’s among the many high suppliers of AI software program platforms.
Palantir may very well be a a lot greater firm in three years
The AI software program platforms market generated $27.9 billion in income in 2023, as per IDC. Palantir completed that yr with a complete income of $2.23 billion. In fact, Palantir’s AI enterprise was in its very early phases at the moment because it launched AIP in April 2023, however it’s value noting IDC named the corporate the No. 1 supplier of AI software program platforms by each market share and income in 2021.
So, Palantir was already within the AI recreation earlier than this expertise took off following the arrival of ChatGPT in November 2022. That is not stunning, as CEO Alex Karp wrote through the launch of AIP that this platform “combines the machine studying applied sciences that we’ve got developed for industrial and navy companions with the newest massive language fashions which have not too long ago captured public consideration, for purchasers throughout the industrial and authorities sectors.”
Assuming all of Palantir’s 2023 income was associated to gross sales of its AI-related software program, its share of the AI software program platforms market would have stood at 8% at the moment. Now that the corporate’s development is accelerating and the general AI software program platforms market is anticipated to develop at an amazing tempo by way of 2028, Palantir appears set for spectacular development.
Assuming the corporate manages to extend its share to even 10% of the AI software program platforms market in 2028, its annual income may exceed $15 billion (contemplating that the scale of the market is anticipated to hit $153 billion in 2028 itself). That might translate into an annual development price of just about 40% primarily based on the $2.8 billion in income that the corporate is anticipated to have generated in 2024.
Palantir at present has a price-to-sales ratio of 63, which is way increased than its five-year common gross sales a number of of 16. The potential acceleration in Palantir’s development over the following three years means that it may justify its valuation. However even when it trades consistent with its five-year common gross sales a number of, Palantir’s market cap in 2028 may hit $240 billion (primarily based on the $15 billion annual income estimated within the earlier paragraph).
That might characterize a possible upside of 57% from present ranges over the following 5 years. Nevertheless, do not be shocked to see this AI inventory delivering stronger good points if it manages to nook an even bigger share of the AI software program platforms market.
