Palantir has a massive growth runway due to its small customer base, but is it big enough?
Finding the next stock that could make you a millionaire is obviously a draw for many people. However, it’s rare to find a company that actually has the potential to grow as large as it needs to become to allow you to become a millionaire from one investment.
To turn $50,000 into $1 million, the stock would need to rise by 20 times. That’s a tall order, a feat that few companies ever accomplish. One stock that some have pointed out with this potential is Palantir (PLTR -0.21%), as its artificial intelligence (AI) software could become widespread. So, could a $50,000 investment in Palantir make you a millionaire?
Palantir’s AI platform is gaining popularity
Part of Palantir’s draw is its dual customer structure. Originally, Palantir only created software for government use. This lucrative market for Palantir still makes up over half of its revenue. However, Palantir recognized the use case for its AI software outside of pure government use and expanded onto the commercial side, which has seen phenomenal growth.
Palantir’s software can be deployed in practically any industry, as the simple concept of data in, insights out is how Palantir works. So whether an intelligence agency is using it to locate a terrorist (which Palantir reportedly helped do with Osama bin Laden), efficiently scheduling hospital staff, or optimizing a supply chain, Palantir has customers covered.
Its latest product, Artificial Intelligence Platform (AIP), has been a huge success, as it allows customers to build AI solutions into every facet of a business.
According to management, the demand for AIP has been “unprecedented” and is a huge reason why its U.S. commercial customer revenue rose 40% year over year in the first quarter.
But does all of this add up to a stock that can increase by 20 times?
Palantir’s growth would need to be incredible to achieve this feat
Despite Palantir generating $634 million in revenue in Q1, its customer base is relatively small. In the U.S., Palantir only had 262 customers. There are far more companies in the U.S. than that, so Palantir’s growth runway is quite large.
However, one drawback to Palantir’s software is its cost. By dividing U.S. commercial revenue by U.S. commercial customer count, you’d get the average price spent per customer. That figure is $573,000. Remember, that’s only quarterly revenue, so the annual cost would be north of $2 million. Not every company can afford that, so its customer base is limited unless Palantir offers cheaper software to capture the bottom end of the market.
Still, if a company devotes 1% of its total revenue to Palantir’s software (assuming a $2 million annual spend), then any company with greater than $200 million in revenue could afford Palantir’s software. There are thousands of companies that meet that guideline, so Palantir could still meet that expectation.
PLTR Revenue (TTM) data by YCharts
To do some quick math, if Palantir were to trade for 13 times sales (the same level that Adobe, the gold standard for software companies, trades at), it would need about $98.2 billion in revenue for the stock to increase by 20 times from this point. Because of Palantir’s expensive starting valuation, its sales would have to increase by 41 times its current level.
If you just use commercial customers, that means it would need over 49,000 customers. That’s a very tall task, considering that Palantir only has 262 customers in the U.S. and 427 worldwide.
So, unless every company adopts Palantir software and spends heavily on it, there’s little chance that a $50,000 investment in Palantir will become $1 million.
Keithen Drury has positions in Adobe. The Motley Fool has positions in and recommends Adobe and Palantir Technologies. The Motley Fool has a disclosure policy.