Palantir: The AI Stock Generating Buzz
Palantir (NASDAQ:PLTR) is quickly becoming one of the most talked-about AI stocks, trailing only Nvidia (NASDAQ:NVDA). The company has experienced quite the rollercoaster ride, and even some of its critics are reevaluating their stance.
Nonetheless, many investors remain cautious about Palantir. The stock trades at an earnings multiple reminiscent of the dot-com bubble, particularly for a company of its size. This skepticism contributed to a dip in its stock price today, even after reporting impressive earnings.
However, it might be useful to examine why some investors, particularly the optimists, have faith in Palantir. The firm specializes in various government and commercial sectors. Once it establishes a presence, it tends to scale effectively, often reducing its workforce even as it grows.
Before diving into valuations, let’s check out the earnings.
Palantir’s U.S. commercial revenue soared by 121% year-over-year, with total revenue up 63% in the same period. The company even raised its full-year earnings forecast to a 53% increase compared to last year. These figures exceeded expectations.
Moreover, total contract value jumped 151% year-over-year, now at $2.76 billion, while U.S. commercial TCV surged by 342% year-over-year. The free cash flow outlook was also upgraded, expected to be between $1.9 billion and $2.1 billion.
We’re observing positive trends across various aspects of the business.
Despite this, the stock remains subdued due to lingering questions about whether the company is growing quickly enough. Palantir may have surpassed expectations, but the market anticipates that AI firms will consistently exceed consensus estimates. This shift suggests a reduced market sensitivity to strong earnings reports.
That being said, if Palantir maintains its current growth trajectory, Wall Street might not stay punitive for long.
The valuation of Palantir can rely on a forward price-to-earnings approach. Using this method, one would effectively be paying 284 times projected 2025 earnings.
While that seems alarming, optimistic analysts tend to focus on free cash flow for valuation. Palantir projected free cash flow up to $2.1 billion, consistently outpacing its own forecasts, which seems reasonable.
Dividing by this cash flow yields a much less daunting 218x multiple for 2025 FCF.
Looking ahead, analysts predict revenue growth of 54% for 2025, followed by 35.8% in 2026, stabilizing in the 30-40% range through 2030.
Currently, the third quarter’s FCF margin stands at 46%. If Palantir can expand that to 50% and meet its revenue targets, it could see 2029 FCF hitting $7.81 billion, which equates to 59 times profit after four years. Going further to 2034, the projected FCF might be about $29.5 billion, with a multiple around 15 times. It’s unlikely that Wall Street would allow more than 200x FCF, but a valuation of 100x in 2034 might position Palantir’s market cap near $3 trillion, translating to a significant increase. But, you know, there are always caveats.
These valuations might be at their most optimistic. Realistically, the PLTR stock is currently trading significantly above fair value. Sure, CEO Alex Karp could surprise the skeptics, but as the company grows, challenges inevitably become more pronounced.
The response to the third quarter will be a telling indicator of market expectations: essentially, perfection. Anything short of that could lead to a swift drop in stock price.
Palantir’s performance is impressive, but I still think it remains a risky investment mainly because of the current financial environment. The stock is outpacing its fundamental performance. Take Nvidia as a point of comparison.
The projections for NVDA indicate a stable trajectory, correlating closely with its operating cash flow.
Now, turning our focus back to Palantir.
The market is currently valuing every dollar of Palantir’s operating cash, and it’s uncertain how long this will last. This situation feels quite speculative and could falter if market sentiment shifts against AI.
In a best-case scenario, the stock might even reach $1,000 in the next decade.
