Palantir Technologies (NYSE: PLTR) has had a strong 2024, with the stock up more than 60% so far. That means it’s more than halfway to a double, so the question becomes, could Palantir double over the entirety of 2024?
While Palantir’s business is strong, some challenges may present themselves as a barricade to achieving that elusive mark.
Palantir’s popularity surged as an investment because of its expertise in artificial intelligence (AI) software. It has been creating AI software longer than many, which gives it a leg up.
Additionally, its latest product, Artificial Intelligence Platform (AIP), may change the industry. AIP allows clients to seamlessly integrate AI into various workflows and build AI into a company’s inner workings. This is an end goal for many companies, but complete integration has been elusive for many years.
According to management, the demand for AIP software is “unprecedented” in the company’s history. This bodes well for Palantir’s future growth, which it needs a lot of to justify its valuation.
In the first quarter, Palantir posted respectable sales growth of 21% companywide. The U.S. commercial customer base was its best division, with revenue rising 40% year over year. This is largely thanks to AIP, but this product hasn’t caught on with Palantir’s biggest clients: government entities. Management believes this integration is coming, but it may be some time as government officials want to do their due diligence before integrating it throughout various branches.
For Q2, management expects revenue of $651 million, indicating 24% revenue growth. Investors love revenue acceleration, and Palantir’s bullish guidance — management raised full-year revenue expectations from a range of $2.652 billion and $2.688 billion to a range from $2.677 billion to $2.689 billion — adds more fuel to the fire of its investment thesis.
However, this revenue acceleration was necessary to maintain the premium valuation attached to Palantir’s stock.
Although Palantir is profitable, it hasn’t reached the levels of maturity of most software companies. As a result, I’ll use the price-to-sales (P/S) ratio to value the stock.
PLTR PS Ratio data by YCharts
At 28 times sales, Palantir’s stock is very expensive. Normally, a growing company should have a growth rate that is, at a minimum, greater than its P/S valuation. Ideally, you can buy a stock with a growth rate 2 or 3 times its valuation, but that’s not the case here.
This is a huge red flag for me.
But what would happen to the stock if it maintained its valuation and grew at a 24% pace for the rest of the year?
If Palantir grows its Q2 and Q3 revenue by 24% this year, Palantir will have trailing 12-month revenue of $2.6 billion (Q4 results do not come out until 2025, so that growth will not be accounted for). Multiplying that figure by the 28 times sales valuation will give us a hypothetical future market cap, which can be used to project Palantir’s growth for the rest of the year. After doing that, Palantir’s stock has 25% upside to end the year.
Bear in mind that is if Palantir grows revenue at a 24% pace in Q2 and Q3 and ends the year at 28 times sales valuation.
If we compare that to the valuation at which Palantir entered the year, that would represent a one-year performance of roughly 93% for Palantir’s stock, not too shabby.
So, Palantir could still be a great investment if it continues growing at its current pace and maintains its lofty valuation. However, that valuation could come down quickly if the market decides it isn’t worth the premium. Unless something drastic changes (such as Palantir’s growth rate exploding or the market being willing to pay more for the stock), Palantir will be just shy of a double throughout 2024.
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Keithen Drury has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
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