Will this Cathie Wood artificial intelligence (AI) stock become a $1 trillion company by 2030?

Artificial intelligence (AI) was a big investment theme driving growth in technology stocks last year. For example, because of the enthusiasm for all things AI, “Magnificent Seven” stocks provided significant returns to shareholders; Nasdaq Composite‘s 2023 return is an astonishing 43%. Notably, five of the Magnificent Seven stocks could boast a market cap of over $1 trillion (meta platform That’s pretty close to $987 billion. tesla ($667 billion).

Meanwhile, many other companies are emerging as AI leaders and challenging big tech. One such business is Palantir Technologies (PLTR -1.53%), which has a presence as part of Cathie Wood’s Ark Invest Fund. Wood was an early supporter of Palantir after its initial public offering (IPO) in 2020.

However, Wall Street was somewhat skeptical of the company because of its heavy reliance on government contracts. Throughout 2022, government transactions, Palantir’s main source of revenue, began to slow, raising concerns about the company’s growth prospects. At one point in 2022, Wood and Ark Investments completely unwinded their positions in Palantir, selling more than 30 million shares.

After plunging in 2022, Palantir stock rebounded nicely last year as demand for artificial intelligence (AI) software soared. Wood and Ark Invest have returned to aggressive purchases of Palantir stock. Palantir is currently Ark Investment’s 24th largest holding in exchange-traded funds (ETFs). With Palantir’s growth prospects looking solid and market investors once again snapping up the company’s stock, let’s dig deeper to assess whether Palantir could ride the AI ​​wave to a $1 trillion valuation. let’s see.

Palantir’s potential is immeasurable.

For years, Palantir was viewed primarily as a government contractor because of its ties to the U.S. military and Western allies. But since becoming a public company in 2020, Palantir has quickly transitioned from relying heavily on large government deals to becoming a more prolific software provider. A big factor in Palantir’s penetration into the private sector is its newest product offering, the Artificial Intelligence Platform (AIP).

While Wall Street spent most of 2023 enamored with startups like ChatGPT developer OpenAI, Palantir continued to move forward and began to make waves in the AI ​​chatter world. To spread the word about AIP, Palantir’s management developed a unique lead generation strategy. Specifically, the company has started hosting immersive seminars it calls “boot camps.”

During these events, prospective customers were provided the opportunity to interact with Palantir’s various software platforms to better identify their AI use cases under the direct guidance of Palantir experts. This approach appears to be resonating, as Palantir has acquired over 100 new private sector customers in the past 12 months.

Perhaps the most exciting feature of this robust customer acquisition model is Palantir’s ability to upsell and cross-sell with these new accounts. The company can quickly strengthen its deal pipeline by having prospective clients test their software and understand how Palantir is a perfect fit for their company’s AI vision. I did. Then, the rapid introduction of AIP and its sibling products gave Palantir the opportunity to sell across the organization in a more efficient manner.

Image source: Getty Images.

The results are impressive, but…

In addition to the growth in its private sector business, Palantir’s overall business experienced impressive growth in 2023. In fact, the company recorded its fourth consecutive quarterly profit on a generally accepted accounting principles (GAAP) basis in the third quarter.Not only is this a testament to management’s ability to run a financially sound business, but this milestone also represents Palantir’s S&P500.

While all of this financial and operational progress is encouraging, Palantir still has a long way to go before its $1 trillion valuation seems appropriate.

$1 trillion by 2030 is too optimistic

Palantir’s current market capitalization is approximately $35 billion. This is approximately 17 times the company’s sales on a trailing 12-month basis. To reach $1 trillion, Palantir’s value would need to increase nearly 29 times in just six years. It’s not an easy job.

Let’s analyze how likely it is to reach a market capitalization of $1 trillion by 2030.

One of the most bullish Wall Street analysts covering Palantir is Wedbush Securities’ Dan Ives. A few months ago, Ives detailed Palantir’s long-term price target and earnings forecast in his research note. He believes Palantir’s total annual revenue will reach $5 billion by 2027. According to management’s latest guidance, Palantir should report $2.2 billion in revenue for all of 2023 (fourth quarter results have not yet been released).

To meet Ives’ 2027 revenue goal, Palantir will need to grow at a compound annual growth rate (CAGR) of about 23%. If he extrapolates this growth rate beyond 2027, Palantir would theoretically generate $9.4 billion in sales by 2030. Using the company’s long-term average price-to-sales (P/S) ratio of 18.6, Palantir’s market capitalization in 2030 would be approximately $175 billion. .

Investors should understand that the above analysis relies heavily on assumptions. Anything could happen in the next few years, but I think it’s reasonable to think that Palantir won’t be a trillion-dollar company by 2030.

Nevertheless, as generative AI becomes increasingly important to businesses of all sizes, Palantir’s growth prospects become impossible to ignore. That’s probably a big reason why Cathie Wood and Ark Invest are back on the stock market. I think it’s reasonable to think that Palantir will be able to achieve sales growth in excess of 20% on an ongoing basis. Given these moves, the current valuation multiple suggests the stock is likely to be a multibagger over the long term.

I think the most important thing to realize is that there are multiple winners in AI. Big tech companies certainly dominate the AI ​​industry, but investors shouldn’t be fooled by startups like Palantir. As such, reaching a $1 trillion valuation by 2030 is probably out of the question, but the current tailwinds support the company’s growth by adopting a dollar-cost averaging strategy for Palantir stock and holding it for the long term. .