Could Palantir Technologies stock double to $70?

Palantir Technologies (NYSE: PLTR) stock has seen solid growth, more than doubling year-to-date from around $16 per share in January to around $34 today, driven by growing demand for big data and analytics services amid a wave of generative AI. While the stock surged 14% in a single day after S&P Global announced its inclusion in the S&P 500 on Sept. 6, the uptrend has been ongoing for quite some time, sending the stock up nearly fivefold since the start of 2023 — about 20 months ago.

Has the peak been reached?

At current price levels, Palantir Technologies stock is trading at about 31x revenue. Is that a reasonable multiple? Perhaps so! Especially considering the fact that the company’s revenue has the potential to grow by over 20% annually over the next few years. The company has consistently posted strong revenue growth over the past few years, with an average increase of 31% over the past 5 years. What’s more, the company’s net margin has improved every year, with the last seven quarters being profitable. We map out a path for the stock to approximately $70 per share over the next few years by analyzing the company’s potential revenue growth, net margins, and price-to-earnings multiple based on several recent long-term service agreements with leading customers.

PLTR has done this in the past

PLTR stock is currently at an all-time high. However, it was at a similar level in early 2021 when the stock hit $34. However, it has been a rollercoaster ride since then. Stock returns were 18% in 2021, 6% in 2022, and 17% in 2023. In comparison, the S&P 500 Index returned 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that PLTR underperformed S&P in 2021 and 2023. The Trefis High Quality portfolio, consisting of 30 shares, has outperformed the S&P 500 every year in the same period.

Why? As a group, HQ Portfolio stocks have delivered better returns with less risk compared to the benchmark index; less of a rollercoaster ride as seen in HQ Portfolio’s performance metrics. Given the current uncertain macroeconomic environment around interest rate cuts and tense geopolitical conditions, will PLTR continue to face a similar situation as in 2021 and 2023? underperform the S&P in the next 12 months – or will there be a sharp increase?

The key is revenue growth combined with margin expansion

As the business scales up, PLTR has been consistently seeing improved business margins, which in turn has resulted in net income growth of 3-4x year-on-year over the last three quarters. While such earnings growth may not be sustainable in the long run, the company is well-positioned to double its earnings every year over the next three fiscal years. Hence, if PLTR’s revenues grow by around 1.6x between FY’24 and FY’26 and margins grow by around 4x over the same period, it would mean that earnings could grow by around 6.4x. Now, if earnings grow by 6.4x, the P/E multiple would shrink to less than one-sixth of its current level, assuming the stock price remains flat. But that is exactly what Palantir Technologies investors are betting on not happening! If earnings grow by 6.4x over the next few years, instead of the P/E shrinking from the current ~190x to ~30x, we think the multiple could be around 50x. This could make a 2x increase in Palantir Technologies shares a real possibility in the coming years – with the shares rising to around $70. What is the time horizon for this high-return scenario? In practice, it won’t really matter whether it takes a year or two – as long as Palantir Technologies is on this trajectory of revenue and earnings expansion and margins are growing, the share price could react similarly.

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