Where Will Palantir Technologies Be in 3 Years?

Palantir Technologies (NASDAQ: PLTR) went public in September 2020, and shares of the company that made its name by providing analytics and software platforms to federal government agencies have shot up a remarkable 608% since then as of this writing.

The stock has comprehensively beaten the 61% gains clocked by the Nasdaq-100 Technology Sector index over the same period, though it is worth noting that Palantir's red-hot rally gained momentum only from April 2023 after the company announced its arrival into the artificial intelligence (AI) software market.

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More specifically, Palantir announced the launch of its Artificial Intelligence Platform (AIP) on April 27, 2023. The stock has soared like a rocket since then, logging gains of 760% as of this writing. This red-hot rally has been driven by the massive growth potential of the generative AI software market that Palantir is looking to tap with this product platform.

But the question is, does Palantir have enough fuel in the tank to deliver more gains to investors over the next three years considering the expensive valuation it is trading at right now?

AIP has supercharged Palantir's growth

To understand the impact of AIP on Palantir's business, we will first take a look at how the company was performing before its foray into the AI software platforms space. Palantir launched AIP in the second quarter of 2023, so I'll examine its first-quarter results for that year.

The company's revenue in Q1 2023 was up 18% year over year to $525 million. Palantir reported an increase of 15% in its commercial revenue for that quarter, while the growth in its government revenue was 20%. It is also worth noting that Palantir's revenue pipeline wasn't growing solidly at that time. This was evident from the company's remaining deal value of $3.4 billion in Q1 2023, which was down from $3.5 billion in the year-ago period.

Palantir points out that the remaining deal value is the "total remaining value of contracts and includes existing contractual obligations and unexercised contract options available to those customers." So, an improvement in this metric ideally boasts of a healthy revenue pipeline, which Palantir was unable to build at that time.

Cut to the present, and the rapid adoption of AIP has started bearing fruit for Palantir. Its revenue in the third quarter of 2024 increased 30% year over year to $726 million. The commercial business has started contributing in a more meaningful way for Palantir as this segment's revenue jumped 27% year over year during the quarter. The government business has also received a nice boost as it jumped 33% year over year to $408 million, pointing to the solid demand for its AIP among government customers.

Meanwhile, the revenue pipeline has also started improving as Palantir's remaining deal value increased by 22% year over year to $4.5 billion. The growth in this metric can be attributed to Palantir customers signing bigger deals with the company following the introduction of AIP. For example, Palantir signed 64 deals worth $1 million or more in the first quarter of 2023. That number swelled to 104 in the third quarter of 2024.

Management has clearly pointed out that AIP is playing a significant role in helping it land more customers and encourage them to spend more on its offerings. On its November earnings conference call, CFO Dave Glazer remarked that AIP is "driving both new customer conversions and existing customer expansions."

The good part is that the AI software platforms market that Palantir is targeting with AIP is currently in its early phases of growth. Market research firm IDC is expecting this market to generate $153 billion in revenue in 2028 compared to just $27.9 billion in 2023. The firm expects AI software platforms to grow at an annual rate of close to 41% during this five-year period.

As a result, don't be surprised to see Palantir's end market expand rapidly, thereby allowing the company to land more customers and also win a bigger share of their wallets considering that it is among the top providers of AI software platforms.

Palantir could be a much bigger company in three years

The AI software platforms market generated $27.9 billion in revenue in 2023, as per IDC. Palantir finished that year with a total revenue of $2.23 billion. Of course, Palantir's AI business was in its very early stages at that time since it launched AIP in April 2023, but it is worth noting IDC named the company the No. 1 provider of AI software platforms by both market share and revenue in 2021.

So, Palantir was already in the AI game before this technology took off following the arrival of ChatGPT in November 2022. That's not surprising, as CEO Alex Karp wrote during the launch of AIP that this platform "combines the machine learning technologies that we have developed for industrial and military partners with the latest large language models that have recently captured public attention, for customers across the commercial and government sectors."

Assuming all of Palantir's 2023 revenue was related to sales of its AI-related software, its share of the AI software platforms market would have stood at 8% at that time. Now that the company's growth is accelerating and the overall AI software platforms market is expected to grow at a tremendous pace through 2028, Palantir seems set for impressive growth.

Assuming the company manages to increase its share to even 10% of the AI software platforms market in 2028, its annual revenue could exceed $15 billion (considering that the size of the market is expected to hit $153 billion in 2028 itself). That would translate into an annual growth rate of almost 40% based on the $2.8 billion in revenue that the company is expected to have generated in 2024.

Palantir currently has a price-to-sales ratio of 63, which is much higher than its five-year average sales multiple of 16. The potential acceleration in Palantir's growth over the next three years suggests that it can justify its valuation. But even if it trades in line with its five-year average sales multiple, Palantir's market cap in 2028 could hit $240 billion (based on the $15 billion annual revenue estimated in the previous paragraph).

That would represent a potential upside of 57% from current levels over the next five years. However, don't be surprised to see this AI stock delivering stronger gains if it manages to corner a bigger share of the AI software platforms market.

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Harsh Chauhan 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.