You can't deny Palantir's (PLTR -3.72%) monster stock run over the last year. Shares are up 237% in the last 12 months and a whopping 600% since going public back in 2020, making long-term investors a fortune. Now, Wall Street traders are piling in to see if the momentum will continue.
Palantir's earnings have grown, but not nearly as fast as its stock price. Smart contrarian investors know it can be dangerous to buy a stock that has run so far ahead of its underlying earnings power. Today, Palantir has a market cap of $151 billion, which is close to cracking the top 100 largest companies in the world (Palantir currently sits at No. 104). After producing these huge gains, I think there are now better stocks you can invest in.
Here are two stocks I think can be worth more than Palantir five years from now.
1. Airbnb offers capital-light earnings growth
If we're looking at stocks that can surpass Palantir in market cap, we need to look at high-quality businesses that are nipping at its heels in market value. Airbnb (ABNB -1.43%) fits this criteria. The lodging marketplace is a capital-light business that generates revenue by taking a slice of every stay hosted through its platform.
Last quarter, $20.1 billion in gross booking value (GBV) was spent on Airbnb, growing 10% year over year. This led revenue to grow 10% to $3.7 billion while net income expanded to $1.4 billion, or a phenomenal 37% net income margin.
Boasting a market cap of $86 billion, Airbnb still has plenty of room to grow over the next five years. It continues to take share within the travel market while solely focusing on lodgings. Over the long term, it should be able to expand to other parts of the travel sector, such as touring, car rentals, and even airline tickets if it so chooses. On the whole, the travel sector is expected to grow by 4% a year for the next five years. Assuming Airbnb can keep taking market share, I think it is reasonable for the company to grow revenue at 10% annually for the next five years.
With a 37% net income margin and 10% growth, Airbnb's revenue can expand to $17.5 billion in five years, and annual net income can expand to $6.5 billion.
2. Lockheed Martin provides steady cash flows
Stock No. 2 is a semi-competitor to Palantir: Lockheed Martin (LMT -0.21%). The storied defense and aerospace contractor trades at a market cap of $125 billion.
The company has a long history of developing product systems for the United States military and its allies. Today, these include aeronautics such as the F-35, weapons systems, missiles, and even work on space exploration. Long-term contracts with the government provide Lockheed Martin with steady revenue and the ability to reinvest in further innovations with its huge research budget.
In 2024, management expects to generate over $70 billion in revenue and $6.2 billion in free cash flow. In the third quarter alone, the company highlighted $700 million in research and capital expenditures to help further propel growth and keep its edge as a technological leader in defense contracting.
Revenue growth will not be explosive at Lockheed Martin, but it doesn't have to be. The stock trades at a forward price-to-earnings ratio (P/E) of 19.7 with a 2.5% dividend yield. It's a dividend that keeps growing year after year, I might add. Over the next five years, I would expect Lockheed Martin's trailing net income of $6.67 billion to slowly expand, perhaps to over $7.5 billion or slightly higher.
LMT Net Income (TTM) data by YCharts
Contrasting earnings potential
Airbnb has the potential to generate $6.5 billion in net income in five years. Lockheed Martin should be generating around $7.5 billion. What will Palantir be generating? A lot less, I would bet.
Over the last 12 months, Palantir generated $2.6 billion in revenue. The company is currently growing faster than Lockheed Martin or Airbnb, with revenue growth of 30% last quarter. Given its runway to sell software across the government and corporate landscape, there is still a lot of room for Palantir's revenue to grow. Staying optimistic, let's estimate that Palantir's revenue can grow at 30% per year for the next five years, reaching $9.65 billion.
Today, Palantir has a net income margin of 20%. Assuming it expands to a 30% margin, Palantir will be generating $2.9 billion in net income in five years. Compared to Lockheed Martin and Airbnb, I think Palantir faces a tough road if it is to maintain its current market cap of $151 billion. Yes, the software player does have a lot of growth potential, but that is talking today, not after five straight years of 30% revenue growth. Except for some of the few great technology companies in history, you can only grow your revenue so fast for so long before the law of large numbers comes into play.
To illustrate further, look at Palantir's projected net income figures versus its current market cap. Assuming the market cap is the same in five years, the stock will be trading at a P/E of 50, which is way above the S&P 500 average of 30. Not only do I think Airbnb and Lockheed Martin can surpass Palantir's current market cap, but I wouldn't be surprised if Palantir's stock price is lower in five years versus where it trades today.
A stock that is up 200% in a year looks enticing. But there is nothing more dangerous to buy for your portfolio.
