Palantir Shares: Potential Fortune-Creator in the Making?

Palantir Technologies (PLTR 3.92%), a service provider in data mining and analysis, had its initial public offering through a direct listing on September 30, 2020. The stock began trading at $10 and eventually reached $39 during the meme stock boom on January 27, 2021, but subsequently dropped to an all-time low of $6 on December 27, 2022. Like many other companies in its field, Palantir's luster faded as growth slowed down and interest rates caused its valuations to contract. It was also a contentious company, receiving backing from the CIA's venture capital arm and used by Immigration and Customs Enforcement (ICE) for deporting undocumented immigrants.

However, if you had invested $100,000 in Palantir at its all-time low, your investment would be worth an impressive $1.37 million today. Over the past two years, Palantir's stock soared into the $80s as sales growth accelerated, profitability surged, and it was included in the S&P 500. Could this growth continue, producing additional million-dollar gains during the next few years?

Essential insights about Palantir

Named after the all-seeing stones in The Lord of the Rings, Palantir was established in 2003 in response to the September 11 attacks. Its Gotham platform collects and processes data for U.S. government agencies, aiming to become the primary operating system for data within the U.S. government. Its Foundry platform serves commercial clients.

Palantir assists large clients in breaking down departmental and computing platform barriers, consolidating all data into a central location, and identifying trends to aid smarter, data-driven decisions.

After its public debut, Palantir initially predicted it would grow its annual revenue by at least 30% until 2025. Revenue increased by 47% in 2020 and 41% in 2021 but only 24% in 2022 and 17% in 2023. The slowdown was primarily attributed to the inconsistent timing of government contracts and headwinds affecting its commercial clients, causing concern among investors.

However, as Palantir's sales growth slowed, profit margins skyrocketed due to cost savings and reduced stock-based compensation expenses. In 2023, it also became profitable for the entire year and was included in the S&P 500 that September.

What drives the market's confidence in Palantir?

Two major factors are contributing to Palantir's stock price increase. First, the company anticipates 26% revenue growth in 2024. This prediction is based on the robust growth of its U.S. commercial business, new government contracts, and the introduction of new AI services for improving data mining services.

Second, profit margins have expanded, and profits are soaring. In the first 9 months of 2024, the adjusted operating margin increased from 26% to 37%, while the adjusted free cash flow margin rose from 26% to 36%, and net income more than tripled using GAAP accounting principles. It expects to remain profitable on a GAAP basis for the foreseeable future.

From 2023 to 2026, analysts predict Palantir's revenue will grow at a compound annual growth rate (CAGR) of 24%, while GAAP EPS will increase at a CAGR of 59%. This growth could be driven by the ongoing geopolitical conflicts, benefiting Gotham, and the secular expansion of the big data and AI markets.

Should investors be cautious about purchasing its high-flying stock?

Palantir is still growing rapidly but is valued at over 160 times its forward earnings and 50 times next year's sales. Some investors believe its advantage as a leader in data aggregation, the stickiness of its government contracts, and its rapidly expanding U.S. commercial business justify these high valuations. Reduced interest rates have also attracted more speculative investors.

However, it's not difficult to find other high-growth digital transformation companies trading at much more reasonable valuations. ServiceNow, the digital workflow services leader, which is expected to grow its top line by at least 20% in the coming years, trades at 67 times forward earnings and 18 times next year's sales.

This might explain why Palantir's insiders sold almost twice as many shares as they bought during the previous 12 months. Palantir's CEO, Alex Karp, has also been selling shares based on a Rule 10b5-1 plan for the past four years. However, this isn't entirely unusual since most of his salary consists of stock-based compensation instead of cash.

Could it turn $100,000 into $1 million once again?

While Palantir has the potential to transform $100,000 into $1 million again, it could take a considerably longer time period than just two years. At these valuations, Palantir's stock could be reduced by half and still be considered overvalued based on its growth potential, so investors should consider gradually accumulating shares instead of relying on a quick million-dollar return.

Despite the current high valuations, Palantir's robust growth predictions and expanding profit margins could attract investors, making it an opportunity for those interested in long-term finance and investing in the stock market. For instance, if an individual had $100,000 to invest, they could consider a strategic approach of buying Palantir shares and slowly building their portfolio, taking advantage of potential future growth. This mindful investing strategy, accompanied by financial planning and market analysis, could potentially turn that initial investment into a significant sum over an extended period.