Prediction: Where Palantir Stock Will Be in 5 Years

Palantir Technologies (NASDAQ: PLTR) has one of the fastest-growing artificial intelligence (AI) businesses on the planet, and as more clients want a piece of its proprietary data analytics platform, growth has been accelerating. The company just reported outstanding first-quarter performance, trouncing Wall Street's expectations, but Palantir stock remained roughly flat after the report, and it's 29% off its all-time high.

Let's see what's happening and try to predict where it might be in five years.

Image source: Getty Images.

Accelerating growth

Palantir's first-quarter results were phenomenal. Revenue is accelerating, profit margins are high, and it's onboarding new clients. Although business is booming all around, its greatest opportunities are in U.S. commercial growth.

Here's how sales have increased over the past few quarters, along with operating margin.

Data source: Palantir quarterly reports. All growth is year over year.

While the market continues to worry about hyperscaler spending and AI monetization, Palantir offers real value using AI and machine learning for its clients. It offers a number of different products that help governments, militaries, and commercial outfits collect data from different places, analyze it, and make critical, informed decisions. That's a tremendous benefit for any organization that wants to become efficient and beat the competition.

CEO Alex Karp noted that the U.S. military, using Palantir's platform, is "dominating on the battlefield," and that "the current environment is actually being transformed by the Palantir Technologies Inc. platform."

Why is Palantir stock down?

Although Palantir has been the poster stock for AI over the past few years, there are some worries that agentic AI is the next phase of the revolution and will take over many of the tasks that software-as-a-service (SaaS) companies perform today. That includes Palantir.

So far, that's far from happening, and management is confident that AI agents won't be able to compete with it. Karp dismissed concerns, saying that clients know it's not true, and he touted that Palantir has only 70 salespeople, as compared to similar-sized companies having 7,000, and only seven actually do any sales.

However, the main reason Palantir stock isn't jumping higher right now is its valuation. Even though growth is accelerating and results surpassed Wall Street's expectations in the first quarter by a long shot, too much of the growth is already built into Palantir's price. It trades at a forward one-year P/E ratio of 75 and a price-to-sales ratio of 70. That implies there could still be more downward pressure on the stock.

What to expect in five years

This sets up a complicated scenario. Revenue is accelerating and the stock is falling, but it's still expensive.

Projecting five years out can go in many directions. Karp said he thinks that revenue will double again in 2027, so that provides a short-term outlook for how the business will progress. "Our biggest problem currently in the U.S. is that we just cannot meet demand," he said.

While it's almost impossible for growth to keep accelerating over the next five years, it should still be growing at a fast rate. One potential scenario has a compound annual growth rate of 50%. In that case, revenue increases from $5 billion today to about $40 billion in five years.

If the price-to-sales ratio gets cut in half, the stock will gain 250%. A price-to-sales ratio of 35 is still expensive, though. At a price-to-sales ratio of 10, which it could still command if it were growing at a rate of 50% annually, total market cap would be $400 billion, or just a bit higher than today's $330 billion.

This is just an exercise, but it gives you a sense of how things could play out. It does look like Palantir could offer patient investors value over the next five years, but not at the same skyrocketing rates it has over the past five years.

Jennifer Saibil 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.