Can Palantir Stock Become the Next Nvidia?

With its stock up 2,500% over the past five years, it’s perhaps no surprise that investors are looking for the next Nvidia (NASDAQ:NVDA). The company was the biggest winner from the artificial intelligence (AI) boom and thus became one of the largest companies in the world.

I was browsing a stock discussion forum recently when I saw an investor asking which stock would be the next Nvidia. The overwhelming response was Palantir (NASDAQ:PLTR). The company has already had a strong 2024 and its shares have been among the biggest gainers on Wall Street this year.

With that said, let’s take a look at what it would take for Palantir stock to become the next Nvidia in the coming years. But first we’ll have to decide what that actually means. Nvidia was trading at an adjusted price of around $5.30 around five years ago (December 6, 2019) and was trading at around $138 at the time of this writing, a gain of around 26x. The company has a market capitalization of approximately $3.5 trillion as of this writing.

Palantir ended 2022 at $6.42 and was trading at around $72 on December 11. From this perspective, the stock would need to reach around $165 to be considered the next Nvidia from a percentage gain perspective, which represents an additional increase of around 130%.

However, if we wanted to define Nvidia as the next $3.4 trillion stock, Palantir’s stock would have to soar 20x. Since investors are likely interested in a stock that will come close to Nvidia’s returns over the next five years, we’ll see if Palantir can become one of the world’s largest companies during that time.

Notably, Palantir’s market capitalization is actually higher today ($165 billion) than Nvidia’s at the end of 2019 ($144 billion).

Palantir needs parabolic revenue growth to become the next Nvidia

Palantir currently trades at what would be considered an astronomical valuation, with a forward price-to-sales (P/S) ratio of around 48 times next year’s analyst estimates. This is a company that grew its total revenue by 30% last quarter.

PLTR PS Ratio (Forward 1y) data by YCharts

That’s not a justifiable valuation given this growth, so some investors certainly see the possibility of Palantir’s growth going parabolic in the coming years. After minimal revenue growth in its 2023 fiscal year ended in January, Nvidia was able to do just that: experience parabolic revenue growth.

For fiscal 2024, its revenue grew by 123%, while in the first nine months of this year it grew its revenue by 135%. Palantir will need to experience similar growth and over a longer period of time, because even though its market cap starts from a higher valuation, its projected sales for 2024 (around $2.8 billion) are much lower than Nvidia’s sales in 2019 ($10.9 billion).

Image source: Getty Images.

Is Palantir the next big AI winner?

Palantir first made its mark with the US government, where its data collection and pattern recognition software helped it become the most effective tool in the fight against terrorism. To do this, he was able to pull data from a multitude of sources and make connections that might not be obvious. Later, its technology was used by the Centers for Disease Control and Prevention to track the spread of COVID-19.

After a period of slowing growth, the company’s growth accelerated this year thanks to the strong momentum of its new artificial intelligence platform (AIP) in the commercial sector. Its number of U.S. commercial customers jumped 77% year-over-year last quarter, while its U.S. commercial revenue soared 54% to $179 million. The company attributes its success in the U.S. commercial sector to “the relentless demand for AI.”

At the same time, the US government has also increased spending after a period of slowing growth. The company’s U.S. government revenue growth slowed to just 14% last year, compared with 19% in 2022. However, its U.S. government revenue soared 40% last quarter, as every part of the government was beginning to embrace the use of large language models (LLM). ).

However, Palantir doesn’t believe that creating the best LLM is the way to win the AI ​​race. Instead, he believes the key to AI progress lies in the application and workflow layer, where his technology resides. It believes this starts with its ontology, which relies on the digital assets built into its platform, such as datasets and models, and then connects them to their real-world counterparts, which can be tangible assets like products or concepts like customer orders.

As such, Palantir is able to use its AIP technology for many different use cases across various industries. It is also capable of quickly moving from proof of concept to AI-based software solutions that can operate effectively in real-world environments through the use of rigorous testing and evaluation tools with its platform.

It’s this ability to make AI operational in real-world environments without any negative impact due to hallucinations (results that make no sense) and lack of transparency that could help make Palantir the next Nvidia. Search results with obvious blunders are one thing, but if organizations use AI solutions as a core part of their business, they can’t let AI make mistakes. This seems to be Palantir’s secret ingredient.

Even though Palantir’s U.S. commercial revenue growth has exploded, much of it remains tied to prototype work. One of the company’s big opportunities lies in the transition to production. Palantir has already seen solid growth within its existing customer base, with a net dollar retention rate of 118% last quarter. This metric reveals the amount of revenue coming from existing customers who have been with the business for more than a year after customers churned. However, this does not include recently added new customers that have already started to grow.

Palantir’s long-term outlook for AI

Adding new customers and moving them into production will give the company the opportunity to see its revenue growth go parabolic. If it has a superior application and workflow layer, it could be the ultimate AI winner on the software side, just like Nvidia was the winner on the hardware side.

That said, much of this is already priced into the stock, which at current levels makes it a rather speculative investment. To reach Nvidia’s heights, the company would need to double its revenue every year for the next five years while maintaining a P/S multiple of 40. It won’t be easy.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool ranks and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.