Palantir Technologies: Strong Growth Amid a Pricey Valuation

Palantir Technologies (NASDAQ: PLTR) has emerged as a heavily traded stock in the U.S. market, particularly among retail investors who appreciate CEO Alex Karp’s candidness. Karp has noted that retail investors have a deeper understanding of Palantir’s business than Wall Street analysts.

The launch of ChatGPT in late 2022 significantly boosted interest in generative artificial intelligence, which increased demand for automation tools. Palantir appears to have been the biggest beneficiary, with its stock price climbing an astounding 1,580% since January 2023, outpacing the next closest contender in the S&P 500, Nvidia, by over 900 percentage points.

Current Investment Considerations for Palantir

This leads to two critical questions: Is Palantir a smart investment currently? Can a $20,000 investment in Palantir this year turn into $1 million over the next decade? Here’s what investors should consider.

Leading the Charge in AI and Machine Learning

Palantir develops software that helps organizations integrate and analyze complex datasets. Its key advantage lies in its ontology-based software architecture, a framework that links digital data to real-world entities to reveal intricate relationships. This approach allows users to extract insights that enhance decision-making over time.

In 2023, Palantir launched its AI platform, AIP, which incorporates natural language processing capabilities into its primary software offerings, Gotham and Foundry. AIP facilitates conversational interactions with these products. Following this development, Forrester Research recognized Palantir as a leader in machine learning and AI platforms.

Recent financial results underscore Palantir’s success since launching AIP, with the fourth quarter of 2024 showing total customer growth of 43%, reaching 711. Additionally, the average existing customer spending increased by 20%. Consequently, revenue rose 36% to $828 million, marking the sixth consecutive quarter of growth acceleration. Non-GAAP net income also rose, climbing 75% to $0.14 per diluted share.

Palantir is well-positioned to sustain this momentum as AI demand grows. Chief Technology Officer Shyam Sankar stated in the fourth-quarter earnings call, “Years of foundational investments in our infrastructure and ontology have positioned us uniquely to harness and deliver on AI demand.” According to International Data Corp. (IDC), spending on AI platforms is expected to grow by 40% annually through 2028.

Image source: Getty Images.

Investment Viability: Caution Advised for New Investors

While Palantir’s position in the AI market is promising, potential investors should note that the stock currently trades at a high price-to-earnings (P/E) ratio. Analysts on Wall Street project earnings growth of 30% annually through 2026, making the current valuation of 265 times earnings seem excessively high.

Despite Palantir outperforming consensus earnings expectations by an average of 12% over the last four quarters, this high valuation remains a concern. Aiming for a 50-fold return, which would be needed to transform a $20,000 investment into $1 million, would necessitate annual share price increases of 48%. This scenario implies a market value hike to $12.5 trillion from a current valuation of $250 billion, which would make Palantir the most valuable company globally—far surpassing Apple’s current $3 trillion market cap.

However, respected analyst Dan Ives from Wedbush Securities forecasts that Palantir could eventually reach a trillion-dollar market value, an opinion shared by many in the industry. Investors keen to own Palantir shares might consider initiating a small position today, while acknowledging that its high valuation raises the risk of significant price volatility. A holding period of at least five years would be advisable for those who invest now.

Is Palantir Technologies a Worthwhile Investment Today?

Before purchasing shares of Palantir Technologies, prospective investors should consider this:

The Stock Advisor analyst team has recently identified what they believe are the 10 best stocks for investors, and Palantir Technologies did not make the list. Those top stocks could yield substantial returns in the upcoming years.

Consider Netflix, which made this list on December 17, 2004. An initial $1,000 investment would now be worth $591,533!

Or Nvidia, which was recommended on April 15, 2005. A $1,000 investment then would now value $652,319!

The total average return from Stock Advisor is 859%, significantly outperforming the S&P 500’s 158%.

The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Nasdaq, Inc.