Palantir (NYSE:PLTR) has certainly been on a rollercoaster ride over the past couple of years. The big data and AI stock languished for much of 2021 and 2022 and the first half of 2023, leaving many investors frustrated. However, sentiment has turned much more bullish since May, with PLTR stock surging a remarkable 142% from its May trough.
In my view, this surge is primarily a result of improved sentiment, not fundamentals. Wall Street has seemingly fallen in love again with the company’s long-term potential, despite persistently-mixed quarterly results. The stock now trades at a steep 79-times forward earnings, indicating investors are paying a hefty premium for its future prospects.
With PLTR stock up so much in such a short span, perhaps it’s time to take a step back and reconsider whether this is still a wise investment for the next five years.
Palantir’s Long-Term Prospects Are Murky
Of course, in the near-term, momentum and sentiment can outweigh fundamentals. Palantir remains a battleground stock with over 8% short interest, indicating many traders are still betting on an imminent decline, with others viewing PLTR stock as a potential short-squeeze play. Therefore, we could certainly see continued volatility ahead.
Personally, however, I believe it is prudent to take a long-term outlook when evaluating Palantir’s merits as an investment. The reality is that prognostications beyond 3-5 years contain immense uncertainty. That is especially true when you throw in hot new growth catalysts like AI.
However, if we peer out to 2028, the company’s forward price earnings ratio on 2028 estimated earnings drops to a more reasonable 25-times. It’s still high, but a far cry from 79-times today’s earnings. Expand the horizon further to 2032, and the multiple falls to just 15-times estimated EPS for that year.
Of course, the rub is that these rosy growth estimates baked into the multiples could prove wildly optimistic. Palantir bulls are essentially betting that the accelerating adoption of AI technologies will fuel a revenue surge over the next decade.
That may be a decidedly speculative bet. Many companies have touted game-changing new technologies that failed to live up to expectations. Who’s to say Palantir’s purported AI edge will fare any better?
How Much Can AI Benefit PLTR Stock in the Long Run?
AI and machine learning adoption is clearly accelerating across industries. As computing power grows exponentially, more applications will emerge. Palantir is relatively well-positioned in this regard.
Realistically, Palantir’s growth trajectory over the next 10 years is highly uncertain. Estimates taken far out into the future should be taken with a huge grain of salt, in my opinion. Nothing is guaranteed.
For context, analysts expect Palantir’s revenue to roughly grow by 450% from 2023 to 2032, reaching $10 billion. That implies roughly 18% compounded annual growth, which is certainly strong growth, but far from exponential. Notably, the company already sports a $38.5 billion market cap today.
Essentially, investors are paying up-front for that decade-plus of projected growth. That’s a risky bet, in my view. Could Palantir’s revenue potentially approach $25 billion+ by the end of the decade if AI adoption truly soars? Perhaps. But that is far from guaranteed. Competition and pricing pressures could equally tamp down Palantir’s growth.
PLTR Stock’s Five-Year Valuation: A Coinflip
As they say, “past performance does not guarantee future results.” This feels particularly relevant when extrapolating the potential value of PLTR stock in 5 year’s time.
Personally, I believe there are much smarter value plays available in the current market, such as Futu Holdings (NASDAQ:FUTU), for example. But if you simply want an estimate on what Palantir could be worth in 2028, I would cautiously peg it around $45 per share, plus or minus 50%.
Admittedly, this is hardly scientific. Valuation models become highly speculative beyond 3-5 year horizons. Too many variables are unknown.
For context, Gurufocus (a site I find quite reliable) estimates Palantir’s fair value will reach only $26 per share by the end of 2025. I believe adding another three years and factoring in bullish AI adoption scenarios makes $45 seem feasible, albeit optimistic.
The Bottom Line
In any case, investing in PLTR stock at today’s valuations requires embracing significant risks that the story may not play out as optimistically as bulls hope. There are never any guarantees when it comes to emerging technologies and future growth.
I won’t completely write off Palantir’s potential, but I simply believe there are companies with far better valuations and bigger upside elsewhere in the market today. But for speculators willing to make a long-term bet on AI and Palantir’s position in that landscape, perhaps the stock will indeed approach $45 per share over the next five years. Just buckle up for a bumpy ride along the way.
On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.