Growth stocks have been in fine form on the market over the past year thanks to numerous reasons, including cooling inflation, the Federal Reserve's pause on interest rate hikes, and a resilient economy. That momentum looks set to continue in 2024.
Investment research firm Fundstrat's Tom Lee predicts that the S&P 500 index will jump as much as 30% this year from 2023 levels. The Nasdaq-100 index is also seeing forecasts of robust gains in 2024 following the impressive 54% jump it clocked in 2023. That's because the Nasdaq-100 has historically averaged a 24% gain in the year which follows a year with 40%-plus gains, according to fintech broker Capex.com.
The market could keep soaring, as the Fed is anticipated to cut the interest rate four times this year, according to Goldman Sachs, as inflation hits the central bank's target of 2%. This could pave the way for more gains at Palantir Technologies (PLTR -3.88%) following the growth stock's red-hot 116% surge in the past year.
In other words, $1,000 invested in Palantir stock a year ago is now worth roughly $2,170. Assuming you have $1,000 in investible cash now after paying your bills, clearing any high-interest debt, and saving for rough times, it may be a good idea to put that money into Palantir stock. Let's look at the reasons why.
Palantir Technologies' growth is set to pick up the pace
Palantir Technologies is known for providing software platforms to government agencies to help them in counterterrorism and intelligence operations, while it also provides solutions to commercial customers for organizing and analyzing their data. The company has witnessed robust demand for its offerings over the years, which explains why its top line has been heading consistently north.
PLTR Revenue (TTM) data by YCharts.
However, a slowdown in government spending means that Palantir's 2023 revenue growth of 16% would be its slowest since the time it went public in late 2020. With the government business accounting for 55% of Palantir's top line in the third quarter of 2023, it is not surprising to see why tepid government spending is likely to weigh on the company's growth.
For some perspective, Palantir's government revenue was up 12% in the third quarter of 2023 to $308 million. Its overall revenue, however, increased 17% year over year to $558 million as revenue from commercial customers was up 23% to $251 million. In simple words, the faster growth in the commercial business helped outpace the tepid performance of the government business.
The good news for Palantir investors is thatthe company expectsits "U.S. government business to reaccelerate beyond the current growth rate of 10% year over year, given the increasing demand for those products to support our allies around the world." A potential acceleration in this segment, along with the impressive momentum in Palantir's commercial business is the reason why consensus estimates are projecting an improvement in the company's growth.
Its revenue in 2024 is expected to jump almost 20% to $2.66 billion. What's more, the company's earnings are expected to jump to almost $0.36 per share in 2025 from the 2023 estimate of $0.25 per share. The following chart points toward an acceleration in Palantir's earnings in 2024 and 2025.
PLTR EPS Estimates for Current Fiscal Yeardata byYCharts.
It is also worth noting that Palantir's earnings could clock a compound annual growth rate (CAGR) of 85% for the next five years, according to consensus estimates. That would be a big improvement over the 8% annual decline in its bottom line over the past five years. A big reason analysts expect such terrific bottom-line growth from Palantir is because of the company's prospects in the artificial intelligence(AI) platforms software market, a niche that's expected to boom big-time in the long run.
TechNavio estimates that the global artificial intelligence platforms market could clock annual growth of almost 35% between 2022 and 2027, generating an incremental $31 billion in revenue during this period. According to market research firm IDC, Palantir was the leading player in this market in 2021, suggesting that it seems well-placed to tap this incremental growth opportunity.
The good part is thatthe company has already witnessed solid interestin its AI software platform which was launched last year. It is looking to push the envelope further by organizing boot campsthat could bring more customers into its fold. Wall Street is also upbeat about Palantir's AI prospects, with one analyst pointing out that itcould be sitting on a $1 trillion revenue opportunityin this space.
As such, it won't be surprising to see Palantir's growth accelerating sharply, and that could lead to impressive long-term upside.
This growth stock is built for more gains
We have already seen that analysts expect Palantir's earnings to grow at a CAGR of 85% for the next five years. Assuming that its bottom line increases at a slower pace of even 50%, its earnings could jump to $1.90 per share (using 2023's estimated earnings of $0.25 per share as the base) after five years.
Using the Nasdaq-100 as a proxy for tech stocks and multiplying the index's forward earnings multiple of 29 with Palantir's projected earnings of $1.90 after five years points toward a stock price of $55. That's more than thrice the company's current stock price, indicating that a $1,000 investment made in Palantir stock right now could triple over the next five years considering the terrific growth it is anticipated to deliver.
That's why investors who have $1,000 in investible cash and are looking to buy agrowth stockshould consider buying Palantir before it flies higher.
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group and Palantir Technologies. The Motley Fool has a disclosure policy.
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Growth Stocks
Growth stocks are shares of companies that are expected to grow at an above-average rate compared to other companies in the market. These companies typically reinvest their earnings into expanding their operations, developing new products, or entering new markets. Investors are attracted to growth stocks because of the potential for capital appreciation as the company's value increases over time. Growth stocks are often associated with technology companies and other industries that are experiencing rapid innovation and expansion.
Inflation
Inflation refers to the general increase in prices of goods and services over time, resulting in a decrease in the purchasing power of money. When inflation is high, the cost of living rises, and each unit of currency buys fewer goods and services. Central banks, such as the Federal Reserve in the United States, monitor and manage inflation through various monetary policy tools, including adjusting interest rates.
Interest Rate Hikes
Interest rate hikes refer to the increase in the benchmark interest rates set by central banks. When interest rates rise, borrowing becomes more expensive, which can have an impact on various sectors of the economy. Higher interest rates can affect consumer spending, business investment, and the cost of borrowing for individuals and companies. The Federal Reserve, as the central bank of the United States, plays a key role in setting and adjusting interest rates to manage economic conditions.
S&P 500 Index
The S&P 500 Index is a stock market index that measures the performance of 500 large companies listed on stock exchanges in the United States. It is widely regarded as a benchmark for the overall performance of the U.S. stock market. The index includes companies from various sectors, such as technology, healthcare, finance, and consumer goods. Investors often use the S&P 500 as a reference point to assess the performance of their investment portfolios and to gauge the overall health of the U.S. economy.
Nasdaq-100 Index
The Nasdaq-100 Index is another stock market index that includes 100 of the largest non-financial companies listed on the Nasdaq stock exchange. The index is heavily weighted towards technology companies, including giants like Apple, Microsoft, Amazon, and Alphabet (Google). The Nasdaq-100 is often seen as a barometer for the performance of the technology sector and is closely watched by investors interested in tech stocks.
Palantir Technologies (PLTR)
Palantir Technologies is a software company that provides data analysis and integration platforms to government agencies and commercial customers. The company's software helps organizations organize, analyze, and make sense of large and complex datasets. Palantir's government business has historically been a significant source of revenue, but a slowdown in government spending has affected its growth. However, the company's commercial business has been growing, which has helped offset the impact of slower government spending. Palantir is also optimistic about the potential for growth in the artificial intelligence platforms software market.
Artificial Intelligence (AI)
Artificial Intelligence refers to the development of computer systems that can perform tasks that typically require human intelligence, such as visual perception, speech recognition, decision-making, and problem-solving. AI technologies are being applied in various industries, including healthcare, finance, transportation, and customer service. The global AI platforms market is expected to experience significant growth in the coming years, presenting opportunities for companies like Palantir that provide AI software solutions.
Please note that the information provided above is based on general knowledge and may not reflect the most up-to-date market conditions or specific details about the companies mentioned.
