Palantir Technologies (NYSE: PLTR) seems to be in the right place at the right time. Investor optimism about artificial intelligence (AI) is rising, while global tensions could boost demand for the company's military targeting and analytics software.

But with Palantir's shares already up by 161% in 2024, how much longer can the bull run last? Let's dig deeper into what the next five years could have in store.

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The power of data

Recently, big data has attracted a surge of interest because of its usefulness in training generative AI algorithms like ChatGPT and others, but its importance has been known for decades. Palantir has been working on big-data analytics since its founding in 2003, developing software-as-a-service (SaaS) platforms that can analyze large volumes of information to detect patterns and glean actionable insights.

The company made a name for itself in the aftermath of the Sept. 11 terrorist attacks, helping the U.S. intelligence community and Department of Defense with highly sensitive missions such as the hunt for Osama Bin Laden. This work likely gave Palantir significant operational experience and, more importantly, a strong economic moat as it established trust with discerning government clients.

SaaS business models also have a level of inherent stickiness. Once an organization commits to using a particular platform, it may be less inclined to switch to an alternative (even if it's better) because of switching costs and the difficulty of retraining its workforce to a new system.

Artificial intelligence supercharged the business

Palantir's operations center around two core SaaS offerings: Gotham (for government clients) and Foundry (for commercial clients). But recently, it has begun offering its Artificial Intelligence Platform (AIP), which combines its legacy data analytics software with large language models (LLMs) to help organizations get real-time insights about their data.

AIP has clear uses in military contexts, where it can supply operators with real-time threats and targets. And Palantir is already working with the armed forces of Israel and Ukraine for combat-related missions.

AIP also boosts Palantir's commercial business, where clients are drawn to the company's reputation for security. The second-quarter earnings highlight its momentum.

Revenue grew 27% year over year to $678 million, led by U.S. commercial revenue, which increased 55% to $159 million. Palantir is also solidly profitable, with adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rising 39% year over year to $261.6 million.

However, to be fair, Palantir's adjusted EBITDA adds back $142 million in stock-based compensation. While paying employees with stock can save cash and incentivize them to work hard, it dilutes current investors' claims on future earnings by increasing the number of shares outstanding. With this in mind, Palantir isn't as profitable as it may look on the surface. But that isn't the only red flag for the stock.

What will the next five years bring?

While Palantir's decades of experience with government clients have given it a strong moat with the intelligence community and defense industry, its position with commercial clients will be much more vulnerable over the coming years. The data analytics opportunity is no easy ride.

For example, Microsoft offers similar services, called Fabric, within its cloud computing ecosystem while also having a strong footprint in generative AI through its stake in industry leader OpenAI. Stiff competition means Palantir will enjoy fewer growth opportunities and more margin pressure.

Valuation is another major concern. With a forward price-to-earnings ratio (P/E) of 106, the stock is valued at an alarming four times the S&P 500 average. The company's current fundamentals don't justify its price tag. And investors who buy Palantir now may have limited returns over the next five years because so many growth expectations are already priced into the stock.

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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

Where Will Palantir Stock Be in 5 Years? was originally published by The Motley Fool