Can Palantir Stock Become the Next Nvidia?

Over the past five years, Nvidia's stock has skyrocketed by 2,500%, which naturally leads investors to wonder what company will emerge as the next big success in the technology market. Nvidia has been a major player in the artificial intelligence (AI) boom, positioning itself as one of the largest companies globally.

Recently, while exploring stock discussions online, I noticed a query about which company might be the next Nvidia. Many investors pointed to Palantir (PLTR). The company has had a solid start to 2024, and its stock has been among the top performers on Wall Street this year.

To understand the potential for Palantir to mirror Nvidia’s explosive growth, we first need to establish what this means. Nvidia had a split-adjusted price of about $5.30 around December 6, 2019, and currently trades around $138, representing a gain of approximately 26 times. As of now, Nvidia’s market cap stands at around $3.5 trillion.

At the end of 2022, Palantir's stock was valued at $6.42, and it reached approximately $72 by December 11. From a percentage gain perspective, Palantir would need to climb to around $165 to be considered like the next Nvidia—a further increase of around 130%.

Alternatively, if we look at what it would take for Palantir to join the ranks of $3.4 trillion companies, its shares would need to experience a 20-fold increase in value. The focus for investors is likely to find opportunities that will yield remarkable returns resembling Nvidia's over the next five years. Let's explore how Palantir could evolve into one of the biggest players in the market in that time frame.

Interestingly, Palantir's current market cap is already more substantial ($165 billion) than Nvidia's was at the end of 2019 ($144 billion).

Palantir Needs Significant Revenue Growth to Compete

Palantir’s current valuation is considered astronomical, with a forward price-to-sales ratio of about 48 times projected analyst estimates for the coming year, especially when the company achieved a 30% revenue growth last quarter.

Such a valuation raises concerns, especially considering its growth rate. Some investors hold onto the hope of Palantir achieving much more significant growth in the upcoming years. Looking back at Nvidia, it exhibited a remarkable revenue spike after a period of stagnation—growing revenues by 123% for fiscal 2024 and 135% in the first nine months of this year. For Palantir to replicate Nvidia's success, it would need to experience similar growth over a more extended period. Current projections estimate Palantir’s sales to be around $2.8 billion for 2024, significantly lower than Nvidia's 2019 revenue of $10.9 billion.

Can Palantir Emerge as a Major AI Player?

Palantir initially gained prominence by assisting the U.S. government in counter-terrorism efforts through its data analysis and pattern recognition software. Its capability to aggregate data from diverse sources enabled it to make connections that weren't immediately obvious. Moreover, its technology played a part in the Centers for Disease Control and Prevention's effort to track COVID-19's spread.

After a slowdown in growth, Palantir has experienced a resurgence in recent times, buoyed by the success of its Artificial Intelligence Platform (AIP), which has gained traction in commercial markets. They reported a 77% increase in U.S. commercial customers year-over-year last quarter, while commercial revenue in the U.S. climbed 54% to $179 million. The demand for AI technology has been a crucial driver behind this growth.

Furthermore, the U.S. government is ramping up its expenditure on technology following a period of slower growth. Palantir’s U.S. government revenue growth slowed to 14% last year, down from 19% previously, yet it bounced back with a 40% increase last quarter, reflecting a broader acceptance of large language models (LLMs) across various departments.

Palantir believes that success in the AI space hinges more on how AI is applied rather than just creating the most advanced large language models. They emphasize the importance of the application and workflow layer, sitting on top of integrated digital assets from datasets to models, and ensuring these are connected to real-world elements, whether physical items or abstract concepts like customer orders.

This approach enables Palantir to harness its AIP technology for a wide array of applications across different industries. It can swiftly transition from proof-of-concept phases to reliable AI solutions ready for real-world use through rigorous testing mechanisms. This ability to minimize issues associated with AI failures could play a pivotal role in positioning Palantir as a competitor to Nvidia in the market.

While Palantir's U.S. commercial revenue is on the rise, much of it remains in experimental stages. A critical opportunity lies in converting these prototypes into full-scale production. Palantir has demonstrated steady growth among its existing clients, evidenced by a net dollar retention rate of 118% last quarter, highlighting how existing clients have increased their spending, not counting the additional revenue from newer clients.

Examining Palantir's Long-Term AI Potential

Attracting new clients and progressing them into full production will be vital for Palantir to realize parabolic revenue growth. By excelling in application and workflow layers, it could emerge as a leading software solution provider in the AI sector, similar to Nvidia's status in hardware.

That being said, the optimistic outlook is already factored into the stock's current price, making it a speculative investment. Achieving results comparable to Nvidia, the company would need to double its annual revenue for the next five years while maintaining a price-to-sales multiple around 40. This is no small feat.

Palantir, Nvidia, AI