Can Palantir Stock Become the Next Nvidia?

With its stock up 2,500% in the past five years, it's perhaps not surprising that investors are looking for the next Nvidia (NVDA -2.25%). The company has been the biggest winner from the artificial intelligence (AI) boom and as a result has become one of the largest companies in the world.

I was recently browsing a stock message board when I saw an investor ask which stock will be the next Nvidia. The overwhelming response was Palantir (PLTR 3.92%). The company has already had a strong 2024 and its stock has been among the biggest winners on Wall Street this year.

With that said, let's dig into what it would take for Palantir stock to become the next Nvidia in the coming years. But first we'll have to decide what that actually means. Nvidia was trading at a split-adjusted price of about $5.30 around five years ago (Dec. 6, 2019) and trades at around $138 as of this writing, which is about a 26 times gain. The company has a market cap of about $3.5 trillion as of this writing.

Palantir ended 2022 at $6.42 and was trading at roughly $72 on Dec. 11. From that perspective, the stock would have to rise to around $165 to be considered the next Nvidia from a percentage gain perspective, which is about another 130% increase.

However, if we wanted to define the next Nvidia as being the next $3.4 trillion stock, Palantir shares would have have to soar 20 times. Since investors are most likely interested in finding a stock that will come close to Nvidia's returns over the next five years, we'll see if Palantir can become one of the world's largest companies in that time frame.

Notably, Palantir's market cap is actually more today ($165 billion) than Nvidia's was at the end of 2019 ($144 billion).

Palantir needs parabolic revenue growth to become the next Nvidia

Palantir currently trades at what would be considered an astronomical valuation, with a forward price-to-sales (P/S) ratio of about 48 times next year's analyst estimates. This is for a company that grew its total revenue by 30% last quarter.

PLTR PS Ratio (Forward 1y) data by YCharts

That's not a justifiable valuation given that growth, so there are certainly some investors who see the possibility of Palantir's growth going parabolic in the years ahead. After minimal revenue growth in its fiscal 2023 ended in January, that's just what Nvidia was able to do -- experience parabolic revenue growth.

For fiscal 2024, it grew its revenue by 123%, while through the first nine months of this year it increased revenue by 135%. Palantir will need to see similar growth and for a longer period of time, since while its market cap is starting from a higher valuation, its projected 2024 sales (around $2.8 billion) are much lower than Nvidia's 2019 sales ($10.9 billion).

Is Palantir the next huge AI winner?

Palantir initially made its mark with the U.S. government, where its data gathering and pattern recognition software helped it become the most effective tool in fighting terrorism. It did this by being able to pull in data from a multitude of sources and make connections that might not be obvious. Later its technology was used by the Centers for Disease Control and Prevention to track the spread of COVID-19.

Following a period of slowing growth, the company's growth accelerated this year with its new Artificial Intelligence Platform (AIP) gaining strong momentum in the commercial sector. Its number of U.S. commercial customers surged 77% year over year last quarter, while U.S. commercial revenue soared 54% to $179 million. The company credited its success in the U.S. commercial sector to "unrelenting AI demand."

Meanwhile, the U.S. government has also been increasing its spending after a period of slowing growth. The company's U.S. government revenue growth decelerated to only 14% last year, down from 19% growth in 2022. However, its U.S. government revenue climbed 40% last quarter as every part of government was beginning to embrace the use of large language models (LLMs).

However, Palantir does not think that creating the best LLM is the way to win the AI race. Instead, it thinks the key to AI moving forward is in the application and workflow layer, which is where its technology sits. It believes this starts with its ontology, which sits on top of the digital assets that are integrated into its platform, such as datasets and models, and then connects them to their real-world counterparts, which can be tangible assets like products or concepts like customer orders.

As such, Palantir is able to use its AIP technology for a lot of different use cases across various industries. It is also able to quickly move from proof-of-concept to AI-powered software solutions that can work effectively in real-world environments through the use of rigorous testing and evaluation tools with its platform.

It is this ability to get AI up and running in real-world environments without any negative impact from hallucinations (outputs that make no sense) and a lack of transparency that could help turn Palantir into the next Nvidia. Search results with some obvious gaffes is one thing, but if organizations are using AI solutions as a critical part of their businesses, they can't have AI making mistakes. This appears to be Palantir's secret ingredient.

While Palantir's U.S. commercial revenue growth has been soaring, much of it is still with prototype work. One of the company's big opportunities is transitioning this into production. Palantir has already been seeing solid growth within its existing customer base, with a net dollar retention rate of 118% last quarter. This metric reveals how much revenue came from existing customers that have been with the company for more than a year after customer churn. However, it doesn't include newer customers recently added that have already been starting to expand.

Palantir's long-term AI prospects

Adding new customers and moving them into production is what will give the company the possibility of seeing its revenue growth go parabolic. If it has the superior application and workflow layer, it could be the ultimate AI winner on the software side, much like Nvidia has been the winner on the hardware side.

That said, much of this is already priced into the stock, which at current levels does make it a pretty speculative investment. To reach the heights of Nvidia, the company would have to double revenue each year for the next five years while keeping a 40 P/S multiple. That won't be easy.