Palantir Technologies (PLTR 6.25%) stock simply took off in 2024, registering eye-popping gains of 340% as of this writing and handsomely crushing the 23% gains registered by the Nasdaq Composite index during the year.
The company, known for supplying software platforms and analytics to both federal and commercial customers, has been in the limelight thanks to the rapidly growing demand for its artificial intelligence (AI) software platform that enables clients to integrate generative AI into their operations. The proliferation of AI software has led to a pickup in Palantir's growth of late, suggesting that the company is well on its way to making the most of a solid long-term growth opportunity.
Here's a closer look at Palantir's long-term growth drivers and whether this high-flying AI stock can sustain its impressive rally over the next couple of years.
Palantir is at the beginning of a massive growth curve
AI software platforms allow organizations and governments to develop, test, deploy, and manage AI applications in the cloud. The demand for these platforms has picked up remarkably in the past couple of years as companies have been finding ways to make their operations more efficient by integrating generative AI into their businesses.
Palantir was ranked among the top five AI software platform providers in 2023 by market research firm IDC, along with big names such as Microsoft, Alphabet's Google, and Amazon. The good part is that Palantir has been able to cut its teeth in the AI software platforms market despite the presence of big tech companies with deep pockets and established cloud infrastructures.
This is evident from the company's quarterly results in 2024. Palantir's top line in the first quarter of 2024 was up 21% year over year, followed by a 27% increase in Q2. The company reported a 30% year-over-year jump in revenue in the third quarter of 2024 to $726 million. Palantir's revenue in the first nine months of the year stands at just over $2 billion, an increase of almost 27% from the same period last year.
That's a big improvement over the 15% year-over-year increase in Palantir's revenue in the first three quarters of 2023. A key reason why Palantir's growth accelerated in 2024 is because of its aggressive go-to-market strategy of landing customers for its Artificial Intelligence Platform (AIP). The company conducted "boot camps" that helped customers understand how to integrate generative AI into their operations in just five days.
Palantir reportedly held over 500 boot camps in 2023. It ramped up that number significantly in 2024, conducting an average of almost five boot camps daily. The results have been positive as the boot camps led to robust growth in Palantir's customer base. Its customer count in the third quarter of 2024 increased 39% year over year to 629, with the number of commercial customers growing at a faster pace of 51%.
For comparison, Palantir's overall customer count in the third quarter of 2023 increased 34% year over year, while the commercial customer count increased by 45%. So, its AIP bootcamps are driving an acceleration in customer growth, but that's not where the good news ends. The customers that Palantir is landing through its boot camps have been signing bigger deals with the company following the initial agreement, as pointed out by management on the November 2024 earnings conference call.
That's the reason why Palantir's total contract value (TCV) increased 33% year over year in Q3 2024, outpacing its actual revenue growth. This metric refers to "the total potential lifetime value of contracts entered into with, or awarded by, our customers at the time of contract execution," so its growth points toward an improvement in its revenue pipeline.
Moreover, Palantir's net dollar retention rate increased by a solid 11 percentage points year over year to 118% in the last reported quarter. That's another sign of improved customer spending as this metric refers to the trailing-12-month revenue from its customers in a quarter to the trailing-12-month revenue from those same customers in the year-ago quarter.
This combination of improved customer spending and the stronger growth in the customer base are the reasons why Palantir has reported a sharp increase in its margins in the past year.
PLTR Operating Margin (TTM) data by YCharts
Is more upside possible over the next three years?
Palantir is operating in a market that's in its early phases of growth. The AI software platforms market was worth an estimated $28 billion in 2023. That figure is expected to jump to $153 billion in 2028 at a compound annual growth rate of 40.6%, according to IDC. So, there is a good chance that Palantir's growth could continue to accelerate over the next three years, which is probably why there has been a jump in Palantir's growth forecasts in recent months.
PLTR EPS Estimates for Current Fiscal Year data by YCharts
However, one factor that may get in the way of Palantir delivering more upside is its valuation. The company has a price-to-earnings ratio of 400, which is extremely rich. The good part is that the forward earnings multiple of 154 points toward a big jump in its bottom line, which can be attributed to the 52% increase in Palantir's earnings for 2024.
Analysts are expecting relatively slower earnings growth from Palantir in 2025 and 2026. However, there is a good chance that the company will be able to do better than that considering the fast-growing nature of the AI software platforms market and Palantir's fast-growing customer base, and that's why the possibility of more upside cannot be ruled out.
So, growth-oriented investors can consider holding on to their Palantir positions as this AI stock may still have room to run higher.
