Where Will Palantir Be in 5 Years?

Palantir Technologies (NYSE: PLTR) has become one of the premier artificial intelligence (AI) software companies thanks to its long history in the field. While some companies have only started integrating AI features within the past few years, Palantir has been doing so since its founding in 2003.

Many investors are bullish on Palantir, and the stock has been bid up as a result. So, where could the stock realistically go in five years?

Palantir's software is a great example of what AI can do

Palantir's software was originally slated for government use but was then extended to commercial businesses after it developed a sizable government customer base. The basic premise of Palantir's platform is data in, insights out. This broad concept means it can be deployed to track down terrorists, direct incoming patients to hospitals, or manage a supply chain.

This product line was quite successful, but its most recent launch should be the company's best. Palantir's Artificial Intelligence Platform (AIP) allows large language model (LLM) integration into a client's systems. This is a key piece of software that will help turn generative AI technology from a novel use case to one that can make a difference within a company.

This product has already been a hit, and Palantir's management continuously refers to the demand AIP is receiving as "unprecedented." This has become evident in its quarterly results, especially from U.S. customers. Companywide, Palantir grew revenue by 21% year over year, but the U.S. commercial segment grew 40% year over year. While the U.S. commercial segment is seeing the bulk of the demand for AIP, management is confident that it will spread to its other segments with time.

But will that growth produce a winning stock over the next five years?

A ton of growth is already baked into Palantir's stock price

Palantir is a difficult company to assess because of the shifting landscape. It wouldn't surprise anyone if Palantir's growth rates continued to ramp up as new customers sign onto the platform and existing ones integrate AIP.

PLTR Revenue (Quarterly YoY Growth) data by YCharts

Wall Street analysts project 21% growth in 2024 and 2025, so using a 20% growth rate over the next five years would probably be realistic. At that pace, Palantir would produce $5.81 billion in annual revenue.

Within five years, Palantir will likely have maximized its profitability as well. Although Palantir has been one of the few software stocks that has achieved solid profitability, its 17% profit margin for the most recent quarter pales in comparison to other mature software companies. A gold standard for Palantir to match would be Adobe's high-20% levels. Investors would consider it a win if it can reach a profit margin of around 27% (Adobe's three-year average).

At $5.81 billion in revenue and 27% margin, Palantir's annual profits would be $1.57 billion. Today's $55 billion market capitalization would value the stock at 35 times earnings. That may seem expensive, but Adobe's price-to-earnings (P/E) ratio over the past five years has averaged 47.5.

If Palantir rose to Adobe's average valuation, that would mean the stock has a 36% upside in five years, or a compound annual growth rate (CAGR) of 6.3%. That's a terrible return on your investment, considering the S&P 500 has a long-term annual growth rate of around 10%.

So, what kind of revenue growth would it take to match the S&P 500's CAGR of 10%? It's about 25%. Bear in mind that also includes achieving top-tier software company margins and trading at Adobe's sky-high premium.

As a result, I think Palantir's business will substantially grow over the next five years, and the company will continue its dominance. However, so much growth is baked into the stock already that it likely won't be a fantastic investment over the next five years.

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Keithen Drury has positions in Adobe. The Motley Fool has positions in and recommends Adobe and Palantir Technologies. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.