The revenue growth acceleration theme continued to impress for Palantir Technologies (NASDAQ: PLTR) last quarter. Revenue in the first quarter of 2025 grew 39% year over year compared to 36% growth in the fourth quarter of 2024, a trend that has been going on for many quarters now. Investors are pleased with Palantir’s booming growth from the artificial intelligence (AI) revolution, which is leading to increased spending from both government and commercial clients for its analytics software.
In the last five years, Palantir stock is up over 1,100%. Here’s what I predict comes next for this huge AI stock market winner.
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Why is Palantir winning?
Palantir has been investing in AI for years, and it is now paying off with client deals for its real-time monitoring solutions for the military and big business. Last quarter alone it closed 31 deals worth $10 million or more, which shows how powerful the Palantir platform is for large organizations. These large deals spurred 71% year-over-year growth in U.S. commercial revenue last quarter, which is the key driver to overall revenue growth acceleration for Palantir.
With the growing demand for AI solutions at large enterprises and within the military budget for the United States and its allies, Palantir should be able to keep growing quickly in the years to come. With revenue of $3.11 billion, Palantir is still not a huge company by revenue and has plenty of room to gain market share in the enterprise software market, especially when you include the U.S. government as its largest customer.
Image source: Getty Images.
Profit margin question
A fast-growing business like Palantir is typically earning a profit margin lower than what it will be able to produce at maturity. The big question for investors is what profit margin is reasonable for the company to achieve once it stops spending so much money on sales and marketing while also getting better operating leverage on its general overhead costs.
Today, Palantir has a gross margin of 80% and a trailing-12-month operating margin of 13%. This is a wide gap because of the hundreds of millions of dollars that Palantir is spending on sales and marketing and research costs each year. These costs will always be around but should get smaller as a percentage of revenue once Palantir gets a larger revenue base. High gross-margin businesses like Adobe or Palantir’s other software peers can run with operating margins of 35% to 40%, which is what I expect Palantir to achieve once the business matures.
That will not be for many years, however.
PLTR PS Ratio data by YCharts
What comes next for Palantir stock
Expectations for Palantir stock are high. The stock has a price-to-sales ratio (P/S) of 94. Not earnings, sales. This is the highest by far for any enterprise software company, meaning that Palantir will need to keep accelerating revenue at a larger revenue base in order to fulfill this gargantuan P/S ratio. I have my doubts this can occur.
Even if Palantir’s business keeps growing at its current rate and achieves the profit margin of Adobe, the stock is wildly overvalued. Five straight years of 39% revenue growth will bring Palantir’s revenue to $16 billion, and a profit margin of about 36% like Adobe means $5.8 billion in annual earnings. Again, these are ballpark figures that may happen for Palantir, but are still very optimistic on its future growth potential.
That $5.8 billion in earnings against the stock’s current market cap of $280 billion is an earnings ratio of 48, and this does not even include income taxes the company will pay. Using a bottom-line net income margin of 30%, this future price-to-earnings ratio (P/E) may be closer to 60 in five years. Again, this is after projected 39% annual revenue growth and massive profit margin expansion. A P/E ratio of 60 is not cheap.
What comes next for Palantir stock is pain for shareholders. The stock may not fall, but it certainly will not go up by 1,000% like it has over the last five years. The stock is plain overvalued even with accelerating revenue growth and is a dangerous buy for investors at a P/S ratio of 94.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe and Palantir Technologies. The Motley Fool has a disclosure policy.
