The paradigm shift represented by advancements in artificial intelligence (AI) has had a profound impact in the marketplace since early last yr. The speed at which the key players within the AI space have ascended the ranks of the world’s most beneficial firms has been breathtaking.
Apple has yielded the No. 1 position to Microsoft, but as of this writing, each boast market caps of over $3.3 trillion. As Nvidia‘s GPUs became the clear favorite hardware for handling AI workloads, the chipmaker soared up the ranks to exceed a price of $3 trillion, and after a transient moment in the highest spot, holds the No. 3 position. Alphabet, Amazon, and Meta Platforms — each of them frontrunners within the AI revolution — boast market caps of $2.2 trillion, $2 trillion, and $1.2 trillion, respectively.
Though it currently has a market cap of just $58 billion, it is not hyperbole to suggest that Palantir Technologies (NYSE: PLTR) makes a powerful candidate for future membership $1 trillion club. Investors merely have to see the speed at which generative AI is being adopted to grasp the magnitude of the chance Palantir is addressing.
Many years of AI experience
Palantir only got here to the eye of AI investors over the past yr or so, but the corporate has a protracted and distinguished track record of developing AI tools. Its original business focus was on helping the varied agencies within the U.S. intelligence community connect their legacy databases, share information, and analyze it, with the goal of allowing them to more effectively uncover potential terrorist plots.
The corporate has since expanded its offerings, first to other government and law enforcement agencies after which to enterprises, providing AI-based data-mining tools that help management make data-driven decisions. Due to Palantir’s vast experience with AI, the corporate was quick to develop additional useful solutions when generative AI got here of age early last yr.
The corporate’s Artificial Intelligence Platform (AIP) is the results of those efforts. Palantir also developed a singular go-to-market approach that has been wildly successful. To land recent customers, the corporate offers “boot camps” to potential clients during which those businesses rapidly develop AI tools they might actually use to satisfy their company-specific needs. These workshops allow prospective customers to work side-by-side with Palantir’s engineers to unravel real-world problems.
In its recent earnings call, management noted that 915 organizations had already participated in boot camps, far outpacing the corporate’s original plan for 500 such workshops. Moreover, the time it’s taking Palantir to shut deals is shortening because once prospects check out AIP, they’re sold.
The resulting demand has been robust. In the primary quarter, Palantir’s revenue climbed 21% yr over yr and 4% sequentially to $634 million. The showstopper metric within the quarter was U.S. industrial revenue, which jumped 40% to $150 million (about 24% of total revenue) because of strong demand for AIP.
Palantir also delivered its sixth consecutive quarter of GAAP profitability, and lots of imagine it’s only a matter of time before the corporate is chosen for inclusion within the S&P 500. Some investors imagine that would occur as soon as this yr. Moreover, its guidance gave investors much more reason to cheer, with management forecasting full-year growth of not less than 45% for its U.S. industrial segment.
The trail to $1 trillion
Palantir’s long track record of AI expertise and its work with each government and enterprise clients have many purchasers in search of it out to deploy AI solutions of their operations. One distinct opportunity that won’t yet be fully baked into Palantir’s stock price is the potential for individual countries in search of to develop sovereign AI solutions, a trend that has already begun. Mix that with the secular tailwinds of enterprise AI adoption and the corporate’s vast opportunity becomes clear. That said, this expansion will take years, if not a long time, to play out.
Based on the consensus view amongst Wall Street analysts, Palantir should generate revenue of $2.7 billion in 2024, giving it a forward price-to-sales (P/S) ratio of about 21. Assuming its forward P/S ratio stays constant from here, Palantir would should grow its annual revenues to roughly $46 billion to support a $1 trillion market cap. Its revenues grew by 21% yr over yr in essentially the most recent quarter. At that rate, Palantir would not reach the $1 trillion threshold until 2039.
Nonetheless, there’s a giant wildcard in play here. Palantir’s U.S. industrial revenue — which incorporates generative AI — grew by 70% yr over yr in 2023’s fourth quarter and 40% in 2024’s first quarter, but its customer counts grew by 55% and 69%, respectively. These figures help for example the rapid, if uneven, adoption of AI.
As mentioned above, when it delivered its Q1 results, management increased its forecast for the segment, guiding for growth of not less than 45% for the yr, and it’s currently Palantir’s biggest growth driver. Moreover, management has a protracted track record of issuing conservative guidance. If the corporate were to deliver average annual revenue growth that was closer to 40%, it could possibly be price $1 trillion in lower than 10 years.
Forecasts regarding the potential for generative AI have been ratcheting higher, but global management consulting firm McKinsey & Company estimates the market could possibly be price between $2.6 trillion and $4.4 trillion annually.
If Palantir continues along its current trajectory and continues to use the AI opportunity, it could reach a $1 trillion market cap sooner reasonably than later.
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1 Unstoppable Stock That Could Join Microsoft, Apple, Nvidia, Alphabet, Amazon, and Meta within the $1 Trillion Club was originally published by The Motley Idiot