With its shares up 2,500% in the past five years, it’s perhaps not surprising that investors are looking to the future Nvidia(Nasdaq: NVDA). The company was the biggest winner Artificial Intelligence (AI) Prosperity and as a result became one of the largest companies in the world.
I was recently browsing a stock message board when I saw an investor asking which stock would be the next Nvidia. The response was overwhelming Palantir(NASDAQ:PLTR). The company has already had a strong 2024 and its stock has been among the biggest winners on Wall Street this year.
With that said, let’s dive into what it will take for Palantir stock to become the next Nvidia in the coming years. But first we need to decide what that actually means. Nvidia was trading at a split-adjusted price of about $5.30 about five years ago (December 6, 2019) and is trading at about $138 as of this writing, representing about 26 times earnings. The company’s market value is about $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 have to rise to around $165 to be considered the next Nvidia from a percentage gain perspective, which would represent another ~130% increase.
However, if we were to define the next Nvidia as the next $3.4 trillion stock, Palantir shares would have to rise 20 times. Since investors are likely interested in finding a stock that comes close to Nvidia’s returns over the next five years, we’ll see if Palantir can become one of the largest companies in the world in that time frame.
It is worth noting that Palantir’s market value is larger today ($165 billion) than Nvidia was at the end of 2019 ($144 billion).
Palantir is currently trading at what would be considered an astronomical valuation, with a futures contract Price to Sales (P/S) The ratio is about 48 times analyst estimates for next year. That’s for a company whose total revenue grew 30% last quarter.
That’s not a justified valuation given this growth, so there are certainly some investors who see the potential for Palantir’s growth to become parabolic in the coming years. After minimal revenue growth in its 2023 fiscal year ended in January, that’s exactly what Nvidia was able to do — experience parabolic revenue growth.
For fiscal year 2024, its revenue increased by 123%, while its revenue during the first nine months of this year increased by 135%. Palantir will need to see similar growth and for a longer period of time, because even though its market capitalization starts at a higher valuation, its projected 2024 sales (about $2.8 billion) are much lower than Nvidia’s 2019 sales ($10.9 billion).
Image source: Getty Images.
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. It did this by being able to pull data from many sources and make connections that may not be obvious. Later, its technology was used by the Centers for Disease Control and Prevention to track the spread of the coronavirus (COVID-19).
After a period of slow growth, the company’s growth has accelerated this year with its new Artificial Intelligence Platform (AIP) gaining strong traction in the commercial sector. Its US commercial customers rose 77% year-over-year in the latest quarter, while US commercial revenue rose 54% to $179 million. The company attributed its success in the American commercial sector to “the continuing demand for artificial intelligence.”
On the other hand, the US government has also begun to increase its spending after a period of slow growth. The company’s US government revenue growth slowed to just 14% last year, down from 19% growth in 2022. However, US government revenue rose 40% last quarter as every part of government began to embrace the use of large language models (LLMs ). ).
However, Palantir does not believe that creating the best LLM is the way to win the AI race. Instead, she believes the key to moving forward with AI lies in the application and workflow layer, where its technology resides. It believes this starts with its presence, which sits on top of 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 such as products or concepts such as customer orders.
As such, Palantir is able to use its AIP technology in a lot of different use cases across different industries. It is also able to quickly move from proof of concept to AI-powered software solutions that can operate effectively in real-world environments by using rigorous testing and evaluation tools with its platform.
It’s this ability to get AI up and running in real-world environments without any of the negative impact of hallucinations (senseless output) and lack of transparency that could help turn Palantir into the next Nvidia. Search results with some obvious errors are one thing, but if organizations are using AI solutions as an important part of their business, they can’t have AI making mistakes. This appears to be Palantir’s secret ingredient.
While Palantir’s U.S. commercial revenue growth has been on the rise, much of it is still within the typical business. One big opportunity for the company is to turn this into production. Palantir has already seen strong growth within its existing customer base, with a net dollar retention rate of 118% last quarter. This metric reveals how much revenue came from existing customers who were with the company for more than a year after the customers left. However, it does not include new clients that have been added recently and have already started expanding.
Adding new customers and moving them into production is what will give the company the potential to see its revenues grow commensurately. If it has a superior application layer and workflow, it could be the ultimate AI winner on the software side, just as Nvidia was the winner on the hardware side.
However, much of this is already priced into the stock, making it a highly speculative investment at current levels. To reach Nvidia’s heights, the company will have to double revenue every year for the next five years while maintaining a 40 P/S multiple. It won’t be easy.
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Jeffrey Seller He has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has Disclosure policy.
