Could $10,000 Invested in Palantir Stock When It Went Public in 2020 Turn Into $1 million by 2030?

If you invested $10,000 in Palantir Technologies (NASDAQ: PLTR) stock when it hit the market through a direct listing roughly five years ago and held on, you would have had a holding worth about $144,630 as of the close of trading on June 14. That would far exceed the approximately $19,000 position you'd have if you'd invested that same sum in an S&P 500 exchange-traded fund. Palantir's excellent performance demonstrates the wealth-creating potential of American tech companies.

That said, past performance is no guarantee of future results. To grow that stake into a $1 million position by this time in 2030, Palantir stock would have to gain 591% over the next five years, or produce a compound annual growth rate of 47%. So how likely is that to happen?

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Palantir serves a booming industry

Palantir's momentum can be credited to its unique business niche in big data analytics. Its software-as-a-service (SaaS) platforms analyze vast volumes of information to help clients discover actionable trends, reduce waste, and combat fraud. This technology synergizes with generative artificial intelligence (AI), and over the last three years, Palantir has incorporated large language models (LLMs) into its software to offer even faster insights.

On the surface, it would appear that the AI industry could offer enough potential to help Palantir's stock maintain its market-beating growth rate. According to analysts at S&P Global, the generative AI market could expand at a compound annual rate of 40% through 2029. While Palantir will face plenty of competition, its focus on military AI systems could give it a wide moat as governments race to modernize their military and intelligence technology.

Image source: Getty Images.

Palantir is already working with the armed forces of Ukraine and Israel to improve their battlefield targeting. And in April, it finalized a deal to provide its Palantir Maven Smart System -- an AI-enabled platform designed to enhance combat awareness -- to the North American Treaty Organization (NATO).

Public and employee pressure has at times led rival tech companies such as Alphabet to shun or cancel controversial defense contracts. Palantir vigorously pursues them.

Respectable business performance

Unsurprisingly, Palantir has experienced healthy demand for its services. In the first quarter, its revenue grew by 55% year over year to $628 million, driven by a tremendous expansion in U.S. commercial and government clients (although the growth of its international business has lagged), while net income more than doubled to $214 million.

CEO Alex Karp seems wildly optimistic about his company's potential, stating in the Q1 letter to shareholders that generative AI is experiencing a "ravenous whirlwind of adoption as an increasing number of institutions grasp the magnitude of the shift that is washing over industry and government." While these remarks may make investors feel like they can still get in on the ground floor of a millionaire-making opportunity, the reality is more complicated.

While Palantir's business seems to be heating up, much of its future growth is already priced into its current valuation. The stock price has grown at a far faster pace than its actual operations.

PLTR data by YCharts.

As a result, Palantir now trades at a forward price-to-earnings multiple (P/E) of 250 -- wildly above the S&P 500's average of 28. To say the shares are priced for perfection would be an understatement.

Can Palantir grow into its lofty valuation?

Palantir's leadership seems to have attracted a cult following, similar to the one that lauds Tesla CEO Elon Musk. Both companies' stocks seem to trade heavily based on hype and optimism rather than on cold, hard business fundamentals. The result has been shares changing hands at unreasonably high valuations that leave them with limited growth potential.

Even though Palantir boasts a compelling business model, it's unlikely to produce the same sort of explosive stock price appreciation in the next five years that it enjoyed in the previous five. Investors who own the shares should consider taking profits.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Nvidia, Palantir Technologies, and Tesla. The Motley Fool has a disclosure policy.