When it comes to growth potential, Palantir (NYSE: PLTR) attracted increased attention in recent months. The generative AI capabilities of its Artificial Intelligence Platform, better known as AIP, delivered massive productivity gains to customers.
Indeed, some of that benefit should accrue to shareholders. The question is whether that gain is sufficient to deliver a 100-fold gain that might help smaller investors, an amount that could turn a $10,000 investment into $1 million or more.
Palantir’s growth potential
Palantir did a smart thing by marketing AIP through its so-called “boot camps.” These forums allow prospective customers to use the platform to solve problems, and given the productivity gains, some customers are going to see massive returns.
One customer claimed to be 10 times more efficient using the AIP platform while using one-third of the resources. Also, Palantir says it closed a seven-figure deal with an unnamed wholesale insurance brokerage just days after demonstrating an automated policy review use case.
Such effects inspire other prospective customers to participate in the boot camps and, likely, sign on as customers if they can leverage the platform to make the said productivity gains themselves.
Financial challenges
Still, investors seeing the triple-digit revenue growth of Nvidia and hoping Palantir will grow as fast may have to temper expectations. In the first six months of 2024, revenue of $1.3 billion rose 24% compared to the first two quarters of 2023. While this represents solid growth for Palantir, it might not be enough for some growth investors.
The profit picture looks better, as Palantir earned $240 million in net income in the first half of 2024 versus the $45 million in the same year-ago period. Still, Palantir has only been profitable since Q4 2022, so the growth rate is likely a virtue of early profitability as much as it is a product of its growth.
Also, its stock price growth has taken Palantir’s forward P/E ratio to 103 and the price-to-sales (P/S) ratio to 35. This is expensive by any measure and probably means that the stock has already realized some of the growth needed to make millionaires.
Moreover, according to consensus estimates, analysts forecast 24% revenue growth in 2024 and 21% the following year. While such growth is bullish for Palantir, it may not be enough to support its current valuation.
Furthermore, Palantir’s market cap has risen to $82 billion. A 100-fold gain in the stock would take the market cap to $8.2 trillion. This is about 2.3 times the $3.4 trillion market cap of Apple, the current market cap leader. That shows the extent of how much Palantir is going to have to grow to make millionaires out of small investors.
Will Palantir mint millionaires?
Palantir can certainly help small investors become millionaires, but it is not likely the SaaS stock will take them to that point on its own.
Indeed, the productivity gains hold the potential to take Palantir stock much higher over time. So, even if new buyers do not become millionaires, they will likely become significantly wealthier by owning this stock.
However, the revenue growth may not yet reflect the growth potential that AIP has now offered its users. That could turn the short- and medium-term outlook for Palantir negative for a time.
Also, even if time proves the analysts wrong and revenue growth accelerates, the $82 billion size of Palantir will mean its market cap will have to be more than double that of the current record market cap to deliver a 100-fold gain from today’s levels. Additionally, investors may question the 35 P/S ratio if that faster revenue growth does not materialize.
Palantir can still emerge as a long-term winner despite those concerns, but at current levels, small investors should temper any “millionaire” expectations.
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Will Healy has positions in Palantir Technologies. The Motley Fool has positions in and recommends Apple, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.
Could Palantir Stock Help You Become a Millionaire? was originally published by The Motley Fool
