Prediction: This Will Be Palantir’s Stock Price in a Year (Hint: It Implies Upside)

Palantir’s financial results have been nothing short of exceptional in recent years

Palantir’s business is expanding at an impressive pace. In the second quarter, revenue increased 93% to $1.9 billion, the 12th straight acceleration, and non-GAAP net income increased 215% to $0.41 per diluted share. Palantir also reported a phenomenal Rule of 40 score of 155%. And CEO Alex Karp expects similar results over the next 18 months.

Morgan Stanley analyst Sanjit Singh says Palantir is emerging as the enterprise standard in AI, calling the company the best margin and growth story in software. “It’s hard to find a better fundamental story in software than Palantir.” However, he also cautions that the company will need to grow into its valuation.

Palantir trades at a rich valuation, but the stock could still reach $205 per share in the next year

Wall Street estimates Palantir’s adjusted earnings will grow at 56% annually through 2027, but analysts have consistently underestimated the company. Palantir beat the consensus earnings estimate by an average of 14% over the last six quarters. Even if that continues, the current valuation of nearly 150 times adjusted earnings looks very expensive.

Investors can also consider valuation from another perspective. Palantir currently trades at 70 times sales, which makes it the most expensive stock in the S&P 500 by a wide margin. CrowdStrike is second at 45 times sales. That means Palantir could lose a third of its value and still be the most expensive stock in the index. That premium is unsustainable.

With that in mind, Wall Street estimates revenue will total $10.1 billion over the next four quarters. Assuming a more reasonable valuation of 50 times sales, the company would have a market value of about $505 billion if it meets the consensus estimate. That implies 18% upside from its current market value of $426 billion, which, in turn, implies a stock price of roughly $210 per share.

As a caveat, while I think that outcome is highly plausible, 50 times sales is still a very expensive multiple. If Palantir’s financial momentum stalls, the market may give the company a much lower valuation, in which case the stock could drop sharply in the next year.

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Bank of America is an advertising partner of Motley Fool Money. Trevor Jennewine has positions in CrowdStrike and Palantir Technologies. The Motley Fool has positions in and recommends CrowdStrike and Palantir Technologies. The Motley Fool has a disclosure policy.

Prediction: This Will Be Palantir’s Stock Price in a Year (Hint: It Implies Upside) was originally published by The Motley Fool