What can be anticipated for Palantir's share price in the next 3 years?
What can be anticipated for Palantir's share price in the next 3 years?
Just a few weeks into its debut in the *S&P 500, Palantir* (PLTR losing -3.72%) wowed investors with its impressive third quarter earnings report, causing shares to soar by 20%. CEO Alex Karp attributed this achievement to an unwavering demand for its AI offerings, a positive sign not only for Palantir but also for the entire AI sector. The company is effectively demonstrating the real-world benefits of AI, lending credence to the massive AI-focused investments by Silicon Valley.
Let's delve into Palantir's current condition and project where its stock might be in three years.
A breakout Q3 performance by Palantir
Palantir surpassed the lofty expectations set by Wall Street. The company reported earnings of $725 million for the quarter, comfortably surpassing the analyst average of $703 million, marking a growth of more than 27% compared to the previous year.
Revenue has been steadily climbing, but the 27% surge in Q3 was its largest since mid-2022.
The most noteworthy aspect is Palantir's increasing efficiency. Its profit margin saw a near 20% quarterly increase and a staggering 275% year-on-year rise. This translates into a substantial boost for earnings per share (EPS), which jumped 80% from the previous year.
Palantir's commercial segment is experiencing rapid expansion
While government contracts remain a cornerstone of Palantir's success, the company's commercial clients serve as a significant growth catalyst. The commercial segment grew an impressive 54% year-on-year, and Palantir anticipates this trend continuing, culminating in 50% more commercial revenue in 2024 compared to 2023. This is where we're witnessing the demand for advanced AI applications blossom, as Palantir's offerings help companies transform data into actionable insights, ultimately enhancing their profitability.
Palantir's success can, in part, be attributed to a new sales program it introduced recently. This program presents potential clients with Palantir-hosted boot camps, providing them with a firsthand experience of how valuable its offerings can be. The strategy stems from Karp's belief that its products are so effective that they would sell themselves. The approach appears to be bearing fruit.
The most impressive aspect of this strategy, in addition to its obvious success, is its cost-effectiveness. Traditional alternatives would involve building a technical sales and customer success team, which is not only expensive but also time-consuming to train. These boot camps, although not cheap, are markedly more cost-effective and can easily be scaled up or down without the need for staffing changes.
This is one of the methods through which Palantir is finding innovative ways to increase efficiency within the company and boost its bottom line.
Palantir's major challenge: its high valuation
Palantir's valuation is particularly inflated, even for a company in high-growth mode. Its price-to-earnings ratio (P/E) leaps beyond 260. For comparison, Nvidia's P/E is 66, relatively high, while Alphabet's is 22. Bear in mind that both Nvidia and Alphabet are more mature, but Nvidia is actually growing at a faster rate than Palantir.
P/E ratios may not tell the whole story here. A better metric to consider is the PEG ratio. This is calculated by dividing a company's P/E ratio by its growth rate. Anything below 1 is usually considered exceptional, whereas a rate above 2 is often deemed less favorable.
Palantir's PEG is 2.2. In contrast, Nvidia and Alphabet have a PEG of 1.
Valuations may not carry the final word, and ultimately, a company's stock is worth what someone is willing to pay for it. However, I have reservations about the stock's longevity in the face of such a lofty valuation. I believe that Palantir will continue to thrive and expand its revenue over the next three years, but I'm not certain it can maintain this rapid growth pace to justify this valuation in the long term.
Given Palantir's impressive financial performance, investors are closely watching its financial strategy for further growth. To sustain its growth, the company needs to manage its high valuation effectively. This could involve prudent investing in new technologies and markets, while also focusing on maintaining profitability to justify its current price-to-earnings ratio.
As Palantir continues to demonstrate the real-world benefits of AI, anticipate finance experts analyzing the potential returns on investing in AI-focused companies. This increased interest in AI could lead to a surge in AI-related financing, potentially driving higher valuations for companies like Palantir.