In the dynamic world of tech stocks, few companies have captured the imagination of investors in 2023 quite like Palantir Technologies (PLTR 0.44%). Shares of this artificial intelligence (AI)-driven data analytics company are up by a blistering 140% so far this year, even after a small pullback in recent weeks.
Given its sizeable runup, the big question going forward is whether the company can manage to continue this stock momentum in the next three years. After all, it faces increasing competition from technology titans with deep pockets such as Amazon, Alphabet, and Microsoft.
Let's find out by analyzing Palantir's fundamentals and valuation in greater detail.
Palantir should benefit from a generative AI opportunity
Long before AI, machine learning, and data analytics became hot investment themes, Palantir Technologies used these technologies to help government agencies and private organizations derive real-time actionable insights from huge mounds of data.
However, Palantir is not resting on its past glory. The company's latest innovation, its Artificial Intelligence Platform (AIP), is proving to be a game changer for the company. More than 100 organizations have already embraced it, while Palantir management said that as of the end of the second quarter, an additional 300 organizations were showing interest. With AIP, Palantir adds integrated AI and large language model (LLM) capabilities to its core offering, which in turn enables it to provide interactive chatbot experiences for its clients. These new capabilities further aid clients in making informed decisions about their businesses.
Palantir also channeled substantial investments into developing the foundational systems and software architecture necessary for clients to fully harness the potential of the LLM models. AIP allows clients to deploy LLMs within private networks, safely and securely. With AIP, Palantir is well positioned to capture a meaningful share in the rapidly growing AI market, estimated to grow annually at a compound average growth rate of 21.6% from $515.3 billion in 2023 to over $2 trillion in 2030.
Palantir is improving profitability and customer count
The financial and operational numbers speak volumes about Palantir's future growth potential. Palantir achieved a major revenue milestone in the second quarter, by crossing the $2 billion mark in trailing-12-month sales. The company reported $28 million in net income under generally accepted accounting principles (GAAP) in the second quarter -- the third consecutive quarter of GAAP profitability. The company further expects GAAP profits in every remaining quarter of 2023. Palantir also guided for a solid 37% year-over-year jump in adjusted operating profits to $576 million for fiscal 2023.
Palantir also demonstrated robust customer growth. In the second quarter, its customer count surged by an impressive 38% year over year to 421 customers. Since its inception in 2003, Palantir's data analytics tools have been used by several government agencies such as the U.S. Air Force, the FBI, and the Department of Health and Human Services. The government sector remains pivotal for the company and accounted for nearly 56.6% of its second-quarter revenue.
However, to reduce overreliance on the government sector, the company has also been focusing on commercial clients. Its U.S. commercial client count rose by a healthy 35% year over year to 161 in the second quarter. Currently, the company earns an average of $2.9 million per commercial customer across the world.
Palantir's valuation and future projections remain high
Palantir trades at a price-to-sales multiple (P/S) of 16.1, which is far more expensive than the software industry median multiple of 2.1. However, since the company went public in September 2020, its average P/S multiple is 18.6 and the median P/S multiple is 16.2.
Analysts project Palantir's revenue will be $4.5 billion in fiscal 2026, almost twice its fiscal 2023 anticipated revenue of $2.2 billion. Assuming that the long-term P/S multiple remains mostly unchanged, considering that it is very close to the company's five-year median multiple, the stock can almost double in the next three years.
A potentially rewarding stock for long-term investors
Palantir's improving financial performance, well-proven AI capabilities, and commitment to innovation and customer experience position it favorably for future success. The company's recent financial move of approving a $1 billion buyback plan underlines its commitment to returning value to shareholders and the management's confidence in the company's growth prospects. Hence, although the stock is definitely not cheap, long-term investors could find Palantir to be a rewarding addition to their portfolio.
