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Written by Keithen Drury for The Motley Fool
Palantir's commercial sales grew at a breathtaking pace.
The company's stock is very expensive right now.
Palantir Technologies (NASDAQ: PLTR) has been one of the top stocks to buy in the artificial intelligence (AI) arms race. Since 2023, Palantir has risen by more than 2,600%. Although it's unlikely to repeat that performance, many investors are bullish on Palantir's future.
But where will that place the stock by 2028? Let's take a look.
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Palantir has been involved in the AI sector for a long time. It began by providing AI software to government entities and made quite a name for itself in that industry. Eventually, it found a commercial use case for its product and expanded into that area.
This side of Palantir's business has been booming lately, and its government business has also performed well. In Q2, Palantir's U.S. commercial business revenue rose at an incredible 149% rate. Palantir's AI business is booming, but not everyone expected it to do so well.
Few companies have defied expectations like Palantir. For several quarters, Wall Street analysts have forecast that its growth rate would slow. Likewise, Palantir's internal projections also indicated growth may slow, but that has never occurred.
PLTR Revenue (Quarterly YOY Growth) data by YCharts
Palantir's growth rate continues to accelerate, and with the widespread AI demand wave, it will likely continue. However, Wall Street analysts are still forecasting a slowdown. For Q3, they estimate 84% growth. For 2027, they estimate 49% growth.
We will see if its growth rate actually decelerates, but if history has anything to say about this trend, I'd be willing to bet that it won't be that much of a decline. Although I wouldn't be surprised to see Palantir's growth rate decrease somewhat, I doubt it's to the degree that Wall Street is estimating. That would flip analyst projections on their heads, but there's only one problem: Rapid growth is already baked into the stock price.
Palantir is one of the most expensively valued stocks on the market. It trades for more than 150 times earnings.
While some tech and growth investors may be used to their stocks trading for sky-high multiples, most of the time, those companies aren't optimized for profits. Palantir is. During its most recent quarter, Palantir posted an impressive 55% profit margin. There's not a lot more room for growth from that perspective, so for Palantir to achieve a reasonable valuation, it must grow its way out of it.
A more reasonable valuation for Palantir would be about 40 times earnings, which would still be somewhat pricey. If that's the case, Palantir must nearly quadruple its earnings. That's no easy task and could take a bit, even with it its revenue rising well above analyst estimates.
At today's $445 billion market cap and a 55% profit margin, Palantir needs to generate $20.2 billion in revenue to produce enough profits to be valued at 40 times earnings. During the past 12 months, it has generated $6.15 billion of revenue. So, it needs to achieve a compound annual growth rate (CAGR) of about 61% from now until 2028.
As mentioned, Wall Street expects a slowdown to about 50% next year. I'd be surprised if that pans out, given analysts' record of underestimating Palantir during the past few years. Still, even if Palantir achieves this impressive CAGR from now until 2028, the only effect would be to bring the stock price to a reasonable level, not to provide additional returns.
That tells me there's already over two years' worth of growth reflected in the stock price, which makes me uncertain about investing in Palantir. It's a fantastic company operating in a rapidly growing sector, but the price is just too rich for me, so I'll pass on the stock for now.
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Keithen Drury 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.