Where Will Palantir Stock Be in 5 Years?

Key Points

• Palantir's international commerce growth is lacking.

• Management has a consistent history of underguiding and overdelivering.

• The stock has a couple of years of growth already priced in.

Making projections about where a stock will be in five years isn't easy, but it's required in investing. The foundational idea of investing in stocks is identifying a stock that is currently undervalued and will become more valuable in the future. While some traders may set a price target for a month or a year away, long-term investors prefer to focus on a three to five-year time frame, as it allows the business to succeed and lets the market properly value the stock.

One of the most popular AI stocks in the market is Palantir Technologies (NASDAQ: PLTR). Palantir delivered excellent returns over the past few years, and investors want to know if it's too late to get in. Let's take a look at Palantir's five-year outlook and see if it's a smart buy today. The answer may surprise you.

Image source: Palantir.

Palantir is showing excellent growth in three of its four segments

Palantir rose to the top of the AI investing world due to its rapid growth and experience in the space. The company began in the early 2000s by offering its AI-powered data analytics software to government entities, but expanded into the commercial sector over the past few years. Government-sourced revenue remains the majority of Palantir's total, but the commercial side is rapidly gaining.

In Q1, Palantir's government revenue increased 45% year over year to $487 million. The growth rate was the same in the U.S. and internationally, indicating that this segment is experiencing healthy growth and adoption worldwide. However, commercial adoption outside the U.S. is slow.

Commercial revenue growth companywide was 33% in Q1, bringing Palantir's total to $397 million. In the U.S. specifically, commercial revenue jumped a whopping 71% and totaled $255 million. This highlights a couple of key facts. First, Palantir's U.S. commercial revenue growth needs to continue at its rapid pace for the stock to keep delivering huge growth. Second, if international commercial revenue starts to accelerate, Palantir's overall growth could really pick up speed.

The biggest region to watch for Palantir's international growth is Europe, which significantly lagged behind the U.S. in AI adoption. However, that could change in the coming years and provide Palantir a second growth catalyst.

Looking ahead in the short term, Palantir's management expects Q2 revenue growth of 38%, a slowdown from Q1's 39% growth. However, investors shouldn't read too much into that, as management has a consistent track record of beating internal expectations. For the full year, it expects revenue of $3.896 billion, representing a 36% increase.

That's still a slight deaccelerating trend, but it could be reversed by increasing international commerce growth. But will that be enough for the stock to deliver strong returns over the next five years?

The stock has incredibly high expectations baked into it

The biggest challenge Palantir's stock faces over the next few years isn't European growth or government revenue; it's the unbelievably high expectations already baked into the stock price. Palantir's stock currently trades for 106 times sales, a level that's practically unheard of for a company growing as "slowly" as Palantir is.

PLTR PS Ratio data by YCharts

I say "slowly" because most companies that achieve a valuation of 100 times sales or greater are at least doubling, if not tripling, their revenue year over year. Palantir isn't even close to that, which raises some red flags.

Most software companies trade between 10 and 20 times their sales, with the best-performing companies reaching a multiple of 30 times sales. For Palantir to return to a still very expensive but far more reasonable 25 times sales, its stock price would have to remain flat and its revenue would have to increase by 422%. Even if we accelerate Palantir's revenue growth from the mid- to high-30% range all the way to 50%, that would take approximately 3.5 years of growth to return to a more sustainable level.

That's nearly all of the five-year period we're examining Palantir's stock for. I believe this indicates how overvalued Palantir's stock is, and I expect the stock to remain relatively flat over the next five years, as nearly all of the growth has already been factored into the stock's price. As a result, I think investors are better off finding other AI stocks that don't have the same expectations built into them.

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Keithen Drury has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.