Shares of AI and data analytics leader Palantir (NASDAQ:PLTR) have skyrocketed by nearly 500% in the last 12 months. With more companies gradually reaching $1 trillion total valuations, investors may wonder if Palantir will be the next to join that small but growing club.
Is Palantir a potential trillion-dollar stock, and how long could it take the company to cross that threshold if it is?
Palantir’s Strong Growth Catalysts
To say that Palantir is growing quickly would be a gross understatement. In Q1 alone, the company reported an overall revenue growth rate of 39%. Net income, meanwhile, more than doubled from the year-ago quarter to a total of $217.7 million.
One of the biggest contributing factors to Palantir’s growth is providing AI and data analytics services to the private sector despite its background in government contracting. In Q1, US Commercial revenue grew 78% year-over-year to $255 million, far outpacing the government revenue growth rate of 45%. Total US commercial contract value exploded by over 180% to a total of $810 million.
Although Palantir is making rapid inroads into the commercial market, the success it is still having in growing the existing suite of government contracts.. Since the Trump administration, which has a close relationship with Palantir, took office, the company has received $113 million in federal contracting dollars. It also recently signed a massive new $795 million contract with the DoD and is in talks with other government agencies for a slew of new contracts.
The Trump administration is reportedly eyeing an even deeper partnership with Palantir to create an integrated system for tracking American citizens’ data across various agencies.
While highly controversial due to surveillance concerns, the project could be enormously valuable for Palantir if it ever comes to fruition. The system would also likely benefit the US government by creating a single database, rather than maintaining costly separate databases at each agency.
Cumulatively, these factors have set Palantir on an extremely strong footing for forward growth. Analysts forecast that earnings per share will keep growing at 31% annually through the rest of this decade.
If we use the trailing EPS of $0.23 as a starting point, this would result in earnings of around $0.89 per share in five years. A 31% long-term growth rate would represent a substantial slowdown from the growth rate Palantir has posted over the last year.
How Much Farther Would Palantir Have to Go to Reach $1 Trillion?
At the time of this writing, Palantir has a market cap of just over $305 billion with just $3 billion in revenues. As such, the company’s stock would have to slightly more than triple to bring the market cap to $1 trillion.
Assuming the company can hit the expected earnings growth rate and its shares increase alongside earnings, Palantir’s market cap would hit the $1 trillion mark well before the end of this decade.
Is PLTR Already Overvalued?
The problem with the assumptions outlined above is the very strong possibility that Palantir is already substantially overvalued. PLTR shares trade at over 503x earnings and more than 100 times sales.
Trading well above $100 per share, they’ve also blown past the consensus price target of $100.19 set by analysts covering the stock for the coming 12 months.
This may very well present a significant obstacle to the company reaching a $1 trillion market cap. Share prices tend to move upward roughly in line with earnings, but it’s very unlikely that Palantir can sustain such incredibly high multiples over a long period of time.
As such, Palantir will have to significantly more than triple its earnings to achieve a $1 trillion total valuation in the long run if the market reduces the multiples investors are willing to pay for it.
With those multiples already running so high, investors who pay today’s prices could be running the risk of a severe contraction in stock prices if Palantir delivers anything less than best-case scenario performance.
So, Is Palantir a Potential Trillion Dollar Company?
Right now, there’s an enormous amount to like about Palantir as a business. It is building a base of reliable government contracts while also growing the commercial side of the business, and setting itself up for what looks set to be many years of growth that surpasses the earnings growth rate of American businesses at large.
While there may be some long-term political risks for Palantir due to its association with the Trump administration’s goals for citizen data, it seems likely that Alex Karp’s firm will maintain its friendly relationship with the federal government through at least 2028.
Palantir also has the advantages of being profitable and having a strong balance sheet. Over the last 12 months, the company has delivered a net margin of 18.3%, a number that could rise rapidly as the company scales its revenues up. Palantir also boasts a reserve of cash, cash equivalents and short-term Treasury instruments of over $5 billion and no long-term debt.
Despite all these pros for the company, the stock is still facing the problem of a valuation that is likely unsustainable. With shares trading at such massive multiples to earnings and revenues, there appears to be a considerable amount of risk in PLTR today.
The sky-high valuation could also eventually put downward pressure on future share price appreciation, making it harder for Palantir to advance toward a $1 trillion dollar valuation even if it keeps its growth rates high.
Although Palantir may someday reach $1 trillion by providing cutting-edge AI and data analytics services, that day still looks very distant.
For a sense of scale, let’s keep in mind that even with its exceptional revenue growth the company has only done $2.9 billion in trailing 12-month revenues. Palantir still has a considerable way to go to grow into its present valuation, let alone tripling that valuation.
So, while Palantir appears to be an exceptional business, it seems like a 12-digit market cap is at best a distant goal for the company.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.