Where Will Palantir Be in 5 Years?

Key Points

• Palantir has become a dominant software company in the age of AI.

• Unlike other software companies that may be threatened by generative AI, it appears Palantir has found a way to harness it.

• Its valuation is sky-high, factoring in more dominance through the rest of the decade. Is that feasible?

• 10 stocks we like better than Palantir Technologies ›

Big data mining software company Palantir (NASDAQ: PLTR) delivered another massive quarter last month, once again wowing the investment community with the red-hot growth it has seen since mid-2023. That's when Palantir unveiled its Artificial Intelligence Platform (AIP), a platform that incorporates third-party large language models (LLMs) into Palantir's Foundry and Gotham software. Since then, the company's growth has accelerated, and profits have lifted off breakeven and solidly into the black:

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PLTR Revenue (Quarterly) data by YCharts. EBIT = earnings before interest and taxes.

But after this impressive run of results, Palantir's valuation has appreciated to stratospheric levels. Currently, shares go for 522 times earnings, 184 times 2026 earnings estimates, and a stunning 115 times sales.

That's a massively high valuation. The question is, will Palantir's revenue and profit growth continue for the next five years, to the point where that valuation makes sense?

Palantir's differentiated solution

Though it went public in September 2020, Palantir had a 17-year history prior to that, beginning as a data platform that helped the U.S. government track down terrorists during the War on Terror. Its software was geared toward gleaning insights from mass data sets, or "finding needles in haystacks." In recent years, Palantir has taken those capabilities to commercial enterprises, which explains a large part of its recent liftoff.

The backbone of Palantir's software is ontology, which creates a digital replica of an organization. Ontology organizes every organization into objects, relationships, and processes, allowing for a general framework that can be applied and customized to the unique elements of each company.

In its annual report, Palantir noted that it seeks out hard-to-solve, labor-intensive data opportunities that other tech companies are unwilling or unable to execute. Enterprise software competitors usually develop a one-size-fits-all piece of software that they aim to sell to a lot of organizations. However, Palantir engages deeply with individual customers and somewhat customizes its platform to their unique needs. Recently, Palantir has developed operating systems for various industries, somewhat standardizing on a per-industry basis.

Palantir's moat is self-evident

While it may be hard for non-technical people to judge Palantir's competitive moat in comparison to other enterprise software companies from the outside, its growth and high profit margins indicate there's something special going on here.

Last quarter, revenue surged 48%, with U.S.-based revenue up 68% and U.S. commercial revenue up 93%. Even government revenue was up 53%, despite the government's recent focus on cost savings. Margins also expanded, with GAAP (generally accepted accounting principles) operating margins expanding from 16% to 27%, and adjusted (non-GAAP) operating margins, which add back stock-based compensation and other items, increasing from 37% to 46%.

So, the reason Palantir trades at such a high valuation is clear. Not only is there accelerating growth, but expanding margins also show Palantir doesn't have to grow spending as fast as it's growing revenue, reflecting either pricing power or insatiable demand for its product that doesn't require lots of marketing.

The accelerating company growth, along with a near-10-point margin expansion, is the makings of a long-term compounder.

Image source: Getty Images.

But is it priced too high?

One interesting tidbit from CEO Alex Karp came on the recent conference call with analysts, when he mentioned, seemingly offhand, that he believes Palantir's U.S.-based revenue can roughly 10x over the next five years.

It's not entirely clear whether Karp means total U.S. revenue, which includes government revenue, or just commercial revenue. He likely meant commercial revenue, based on the context in which he was speaking.

Is a tenfold increase in U.S. commercial revenue achievable? Over five years, that would equate to about a 58% compounded annual growth rate. And last quarter's growth rate was 93%. So, while keeping that rate up is much harder as the business grows, it doesn't appear that Karp's prediction is totally impossible.

Last quarter's U.S. commercial revenue was $306 million, good for a run rate of about $1.2 billion. So, a 10x would yield about $12 billion in revenue by the end of 2030. Keep in mind that this would only be for U.S. commercial purposes.

Meanwhile, U.S. government revenue was $426 million last quarter, about a $1.7 billion run rate, a 53% increase. The remaining international business amounted to only $267 million, or a run rate of a little over $1.05 billion.

Assuming the U.S. commercial business grows tenfold, the U.S. government business triples to $5 billion over that time, and the international business, which is slower growth, "merely" doubles to $2 billion, Palantir could very well be on to making close to $20 billion in revenue over the next five years, should Karp's prediction for U.S. commercial revenue pan out.

The bad news

The bad news is that even if net margins expand to some 50% over that time -- keep in mind that even a company like Microsoft has net margins of only 35.6% today -- Palantir will still be making only about $10 billion in earnings, even if that rosy scenario comes to pass. Today, its market cap is already $367 billion.

So, the stock is trading at roughly 37 times an earnings figure that's already optimistic and based on nearly unprecedented growth years into the future, as well as healthy profit expansion 15 percentage points above Microsoft's. Remember that there is also the time value of money to be aware of here, and five years isn't nothing.

So, while Palantir's eye-popping growth has made unheard-of earnings growth a definite reality for the medium term, it seems the market has already priced this rosy scenario in...and then some.

That being said, Palantir could be a very unique company that finds other new avenues of growth, or it could potentially continue raising prices if indeed most U.S. corporations come to depend on its ontological software for their core business needs. Therefore, it's a company every investor should be aware of and open to buying in if the stock pulls back far enough.

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Billy Duberstein and/or his clients have positions in Microsoft. The Motley Fool has positions in and recommends Microsoft and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.