Palantir Technologies (PLTR 1.38%) is one of the more polarizing stocks in the market at present. It has been a very strong performer over the past year, up over 150%. However, that has also left it with a very hefty valuation.
The case against Palantir
The bearish case for Palantir largely centers around its valuation and current growth rate. The stock currently trades at forward price-to-sales (P/S) ratio of just under 19.
PLTR PS Ratio (Forward) data by YCharts
If Palantir were growing its revenue at a breakneck pace, that valuation could be easily justified. However, the company grew its revenue by only 17% in 2023. That's solid growth, but probably not enough to justify a P/S multiple of 19. Revenue did begin to accelerate as the year moved on, with its best quarterly revenue growth coming in the fourth quarter. However, that Q4 revenue growth was still just 20%.
Looking ahead, the company guided for full-year 2024 revenue to be $2.652 billion to $2.668 billion. That would represent growth of 19% to 20%.
Software-as-a-service companies (SAAS) with growth of around 17% to 20% have generally traded closer to 7 times sales in recent years, so Palantir's current valuation is much higher than that of most SaaS companies with similar growth.
Image source: Getty Images.
The case in favor of Palantir
The bullish case for Palantir revolves around its mission-critical technology serving the private sector, and growing opportunities in the public sector and with artificial intelligence (AI).
The company rose to prominence with its data gathering and analytics platform that helps U.S. government intelligence agencies track and fight terrorism, and helps with other mission-critical tasks. Its technology also played a big role in helping the Centers for Disease Control and Prevention (CDC) track the spread of COVID-19.
Government revenue, however, has slowed the past couple of years, growing 19% in 2022 and only 14% in 2023. That said, awards of government contracts to private-sector contractors are notoriously lumpy, particularly when it comes to the U.S. government, as long periods of time can go by without any awards followed by several large awards in close succession. In fact, the U.S. government only passed a spending bill for the current fiscal year ending in September 2024 last month, well past the beginning of the fiscal year in October 2023. Palantir's U.S. government business could certainly start to pick up now that there is a spending bill in place, and management has indicated its government business should begin to reaccelerate this year.
Commercial sector revenue, however, has already started to increase more rapidly. It grew 32% in Q4, with U.S. commercial revenue soaring 70%. Palantir's commercial success is being driven by its new Artificial Intelligence Platform (AIP) product and boot camps.
The company is using boot camps to introduce AIP to potential customers. These workshops introduce how AIP can be applied to mission-critical operations and potential use cases, and provide onboarding and training. Management has said the use of boot camps is reducing sale cycle times and helping it accelerate new customer acquisitions.
More recently, Palantir announced a partnership with Oracle (ORCL -0.61%) whereby Planatir's AI and decision acceleration platforms will be deployed across Oracle's distributed cloud platform. Oracle's cloud platform is growing quickly, so it should help drive growth for Palantir. However, Oracle's cloud services segment is still much smaller than the big three of Microsoft's Azure, Amazon Web Services, and Alphabet's Google Cloud.
If AI and Palantir's recent deal with Oracle can help Palantir reaccelerate its growth, the company could grow beyond its current valuation.
Where Palantir stock will be in 3 years
If Palantir can boost its revenue growth to 30% this year and next before returning to 25% revenue growth in 2026 and 20% in 2027, the company would generate revenue of about $4.7 billion in 2026 and $5.6 billion in 2027. Given Palantir's strong moat and unique technology, I think the stock could command a slightly higher multiple than that of company peers. Place a 9 times forward P/S multiple at the end of 2026 on the stock's 2027 revenue, and the stock would be trading right around where it currently does with its $50.5 billion market cap.
While Palantir stock should see a lot of volatility over the next few years, I think at the end of 2026 it should trade close to where it does today.
