Up 110% This Year, Can Palantir Technologies Stock Rally 2x to $70

Palantir Technologies stock (NYSE: PLTR) has had a solid run, rising more than 2x since the beginning of the year from levels of about $16 per share in January to about $34 presently, led by surging demand for big data and analytics services on the back of the generative artificial intelligence wave. While the stock witnessed a single-day surge of 14% after S&P Global announced its inclusion in the S&P 500 index on September 6, the bullish trend has been for the long term, which saw the stock rise almost five times since the beginning of 2023 – around 20 months ago.

Has the peak been reached?

At the current price level, Palantir Technologies stock trades at about 31x trailing revenue. Is this a reasonable multiple? Possibly yes!  Especially if you consider the fact that the company’s revenues have the potential to grow by more than 20% annually in the next few years. Over the last few years, the company has consistently reported strong revenue growth with an average growth of 31% in the last 5 years. Moreover, the company’s net margin has witnessed an improvement every year, with the last seven quarters being profitable. We outline a path for the stock to rise to levels of about $70 per share in the next few years by looking at the company’s potential revenue growth, net margins, and its price-to-earnings multiple on the back of several recent long-term service contracts signed with leading customers.

PLTR has done it in the past

PLTR’s stock price is currently at its lifetime high. However, a similar level was witnessed back in early 2021, when its stock price reached $34 levels. However, since then it has been a roller coaster ride. Returns for the stock were 18% in 2021, 6% in 2022, and 17% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that PLTR underperformed the S&P in 2021 and 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period.

Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and tense geopolitical conditions, could PLTR continue to face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

Revenue growth coupled with margin expansion is the key

With an increasing scale of operations, PLTR has consistently reported improvement in its business margins, which in turn resulted in net income increasing by 3-4x in the last three quarters on a year-on-year basis. While such growth in earnings may not be sustainable over the long run, the company is in a position to double its earnings every year over the next three fiscal. Consequently, if PLTR’s revenues grow by about 1.6x between FY’24 and FY’26, with margins expanding by about 4x over the same period, this would imply that earnings can grow by around 6.4x. Now if earnings grow 6.4x, the P/E multiple will shrink to less than a sixth of its current level, assuming the stock price stays the same. But that’s exactly what Palantir Technologies investors are betting will not happen! If earnings expand 6.4x over the next few years, instead of the P/E shrinking from around 190x presently to ~30x, we think that the multiple could stand at about 50x.  This could make a 2x rise in Palantir Technologies stock a real possibility in the coming years – with the stock rising to levels of about $70.  What about the time horizon for this high-return scenario? In practice, it won’t make much difference whether it takes 1 year or 2 – as long as Palantir Technologies is on this revenue and earnings expansion trajectory, with margins trending up, the stock price could respond similarly.

[1] Returns as of 9/10/2024
[2] Cumulative total returns since the end of 2016

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