Artificial intelligence (AI) will dominate the market until early 2024. NVIDIA recently became the world’s most valuable company, up more than 150% year-to-date. Investors are betting that AI will be a huge market opportunity as major tech companies spend tens of billions on it.

Palantir Technologies (NYSE:PLTR) is one of those AI companies. Shares are up 40% year-to-date, with revenue growth picking up as customers use the company’s intelligent software and analytics tools. Where will this AI winner land by the end of 2024? Let’s take a closer look and find out.

Intelligent software for defense and commercial customers

At its core, Palantir develops customized, advanced analytics software. Customers include the U.S. military and its allies (last quarter alone, the U.S. government’s revenue was more than $250 million) and the private sector. Companies – especially larger ones – use Palantir’s tools to analyze operations and track a company’s performance.

Recently, Palantir has been pushing its artificial intelligence platform (AIP) for its customer base. I won’t pretend to be an expert on how these tools actually work, but automated intelligence that provides useful insights can be important for complex organizations.

And it looks like these tools are working. In the last 12 months, Palantir has generated revenue of $2.33 billion. In total, the company has 554 customers, 427 of which are commercial organizations (i.e., non-government agencies). At the end of 2020, there were only 49 commercial customers.

Accelerated growth and profitability

In recent quarters, Palantir’s revenue growth has accelerated again. This is probably why the stock has risen so much this year; investors love increasing revenue. In the last quarter, revenue rose 21% year-over-year to $634 million, driven by 27% growth in the commercial segment. In 2023, year-over-year revenue growth had dropped to around 12%.

Profitability is currently sparkling, which is a great sign for the stock. Net income for the last 12 months was $300 million, a huge improvement from annual losses of $500 million to $1 billion a few years ago. Palantir is proving that it can grow efficiently (that is, while generating profits), a sign of a healthy software company.

PLTR PS ratio data by YCharts

Where will it be at the end of 2024?

Palantir is an exciting company. Revenue should continue to grow as more companies adopt AI and software analytics. However, the stock still looks expensive and I wouldn’t buy it in the summer of 2024. Let’s look at some numbers to show why.

Today, Palantir has a market cap of $54 billion. That gives it a price-to-sales (P/S) ratio of 24. Remember, that’s a revenue ratio, not an earnings-based one. With an operating margin of 8%, Palantir isn’t generating much profit per dollar of revenue. Margins will likely expand over time, but that’s not certain.

But even with rising margins, the stock still looks expensive. Assuming Palantir can grow its revenue by 30% annually for five years (an acceleration from current levels), the company will generate $8.65 billion in earnings in five years. At a 30% profit margin, that equates to $2.6 billion in earnings, or a price-to-earnings (P/E) ratio of about 21 over the next five years.

This is not much lower than the S&P500 the index’s long-term P/E ratio. This should show investors that Palantir stock is already pricing in five years of 30% revenue growth and a 30% increase in profit margins. These are some lofty expectations that should discourage investors from buying Palantir in mid-2024.

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Brett Schafer does not own any stocks mentioned. The Motley Fool owns and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.