2 Reasons to Buy Palantir Shares Like There’s No Tomorrow

Palantir Technologies (NASDAQ: PLTR) The stock’s impressive 372% rise in 2024 has made the stock extremely expensive, which explains why investors may be wary of buying this high-flying artificial intelligence (AI) software specialist now same

Wall Street expects Palantir shares to fall in the coming year, as evidenced by the 12-month average price target of $39, which points to a 48% downside from current levels. According to 22 analysts who cover Palantir, this average price target suggests that the stock may have gotten ahead of itself, and that’s not surprising when we take a look at its valuation multiples.

After all, a price-income ratio of 399 and a sales multiple of 72 tells us that investors will have to pay significantly rich multiples to buy this AI stock. Loaded with technology Nasdaq-100 The index, on the other hand, trades at 32 times earnings. However, there are a couple of reasons why Palantir might be worth buying on the cuff despite its expensive valuation.

Palantir’s growth has accelerated in recent quarters thanks to growing demand for the company’s Artificial Intelligence Platform (AIP), which enables governments and organizations to integrate generative AI into their operations. It’s worth noting that this platform was last year ranked as the AI/ML (Machine Learning) platform by market research firm Forrester, ahead of well-established names such as Microsoft, Amazoni IBMamong others.

However, this was not the only time that Palantir has ranked among the top vendors of AI software platforms. In September 2024, Dresner Advisory Services gave Palantir the best score for usability and analytical features and functions in its AI, Data Science and Machine Learning market study. Meanwhile, market research firm IDC ranked Palantir as #1 in the AI software platform market in 2021.

IDC notes that the AI software platform market was worth an estimated $14.2 billion by 2021, growing nearly 37% that year. Palantir’s 2021 revenue was $1.54 billion, with 41% growth for that year. However, Palantir made most of its revenue in 2021 from selling software platforms and analytics solutions to government customers.

It’s only in recent quarters that its AI business has started to take off, which is evident from the rapid growth of the company’s commercial customer base. For example, in 2021, Palantir’s commercial revenue rose 34% to $645 million, compared to 47% growth in government revenue, which was $897 million.

Coming to Palantir’s latest results for the third quarter of 2024, its number of commercial customers increased by an impressive 51% year-over-year to 498. Given that Palantir had a total of 629 customers at the end of the quarter, it can be assumed that the company ended the quarter with 131 public clients, compared to 123 in the same quarter a year ago.

This massive jump in the commercial customer base is the result of rapid adoption of Palantir’s AIP, which has witnessed strong demand in recent quarters thanks to the aggressive market exit strategy to carry out “training camps”. Not surprisingly, Palantir now projects at least 50% growth in its US commercial business by 2024 to $687 million. This points to a solid growth jump of 36% by 2023 to $457 million.

This fantastic adoption of Palantir’s AIP should allow it to remain a major player in the AI software platform market for the long term, and that should be a solid tailwind for the company. This is because the AI software platform market size is expected to reach $153 billion by 2028, according to IDC. As Palantir is rapidly building a large commercial customer base, it should be able to take full advantage of this large addressable opportunity and continue to deliver more solid bottom line growth in the coming years.

Palantir’s earnings are growing at a faster rate than its revenue. In the third quarter of 2024, the company’s adjusted earnings rose 43% year-over-year to $0.10 per share compared with a 30% increase in revenue to $726 million. This faster growth in results can be attributed to the company’s ability to first acquire a new customer and then expand its business with those customers.

Palantir management offered some examples of this on the November earnings call:

To highlight some notable deal cycles: a large US equipment rental company expanded their work with us less than eight months after becoming an enterprise deal, increasing account ARR by 12; a bottled water maker, a specialty pharmaceutical company and an agricultural software provider all signed seven-figure ACV deals less than two months after their initial boot camps.

This is a trend that will likely continue thanks to the secular growth of the AI software platform market and Palantir’s AIP offering, which is considered superior compared to its peers. As a result, Palantir should continue to enjoy favorable unit economics, as its land-and-scale strategy will allow it to generate more profit from each customer.

The effects of favorable unit economics are already visible in Palantir’s margin profile. The company posted an adjusted operating margin of 38% in the third quarter of 2024, up from 29% in the year-ago period. That number could increase in the future and drive Palantir’s profit growth, as it has been adding new commercial customers at a rapid pace lately, and those customers could strengthen their relationships with the company to deploy generative AI solutions.

That’s why it would be wise to look beyond Palantir’s valuation. The company is expected to post a 52% jump in earnings in 2024 to $0.38 per share. Estimates for 2025 and 2026 have risen significantly in recent months, a trend that could continue, as the discussion above indicates.

PLTR EPS Estimates for Next Fiscal Year Chart — PLTR EPS Estimates for Next Fiscal Year data for YCharts

As such, investors looking to add a growth stock to their portfolios would do well to look at the bigger picture rather than just the valuation as the multibillion-dollar opportunity in AI software platforms, Palantir’s strong position in this market and the company’s efforts to make the most of this space could help it stay as one of the top AI stocks for the long term.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. They drive hard has no position in any of the aforementioned stocks. The Motley Fool has positions in and recommends Amazon, Microsoft and Palantir Technologies. The Motley Fool recommends International Business Machines and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has one disclosure policy.

2 Reasons to Buy Palantir Shares Like There’s No Tomorrow was originally published by The Motley Fool

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