Palantir stock is surging! And in 12 months, it could be worth…

Few companies have come close to delivering the returns generated by Palantir Technologies (NASDAQ:PLTR) stock over the last 12 months. The data analytics enterprise has seen its market-cap explode by 470% in just the last 12 months as management secures strategic government contracts and demand for its artificial intelligence (AI) solutions surges.

So anyone who put £5,000 to work this time last year is now sitting on a pretty impressive £28,500 hoard. But could this be just the tip of the iceberg?

More growth on the horizon

In 2024, Palantir generated around $2.8bn in revenue. Yet, if management’s recently upgraded guidance and analyst projections prove accurate, these figures could more than double over the next three years. And when pairing this with the group’s existing double-digit profit margins, earnings look primed to surge as well.

At the heart of this explosive growth story is the group’s impressive AI offerings being used by businesses and governments alike. In fact, the latter’s responsible for about half of its top-line income. And for shareholders, that typically translates into larger, stickier contracts that provide greater visibility for future revenue and cash flow.

However, this also acts as a bit of a double-edged sword. While having governments as customers can be advantageous, it also means Palantir is highly sensitive to Federal budget cuts. At the same time, government contracts often go through an intense bidding process. This limits the group’s ability to exercise pricing power, especially with rival alternatives such as Snowflake and Microsoft pushing into the AI analytics space.

Management isn’t blind to this risk. And the proportion of income from commercial customers has been steadily rising over the years to try and diversify this problem away. But progress on that front has been relatively slow.

Where’s the price going?

After such a tremendous run, its not uncommon to see growth stocks go through a bit of a volatile period as the financials try to catch up to lofty expectations. Shareholders already caught a glimpse of what that could look like earlier this year, with the Palantir share price tumbling more than 40% between mid-February and early April.

The shares have since bounced back. However, looking at the average consensus among institutional analysts, the storm might not be over yet. As of May, the average 12-month share price target sits at $97.46 – around 20% lower than where the shares are trading today. And even that might be too optimistic.

Even on a forward basis, the group’s price-to-earnings ratio is a massive 227! In other words, the valuation’s completely divorced from the firm’s underlying fundamentals, with its impressive anticipated growth already baked into the share price. Historically, such premium valuations are unsustainable.

So while I admire Palantir as a business, it doesn’t look to me like a great stock investment to consider right now.