• Palantir reported another strong quarter of growth for Q1, but the stock fell sharply.

• One Wall Street analyst predicts Palantir’s market cap will reach $1 trillion in three years, implying a fourfold increase from the current share price.

• Palantir is executing against a tremendous growth opportunity, but the stock's valuation leaves no room for missteps.

Palantir Technologies has been one of the best-performing stocks of the year so far, up 43% year to date. But the artificial intelligence (AI) software company's strong first quarter wasn't enough to push the stock to new highs. The stock was trading down over 10% after the earnings news.

Investors have high expectations for the company's performance. The stock is priced for perfection and then some, trading at 474 times earnings. The expensive valuation is the most common reason cited for why the average Wall Street analyst has a "hold" rating on the shares.

However, one Wall Street analyst remains very bullish on the stock's prospects. Wedbush analyst Dan Ives reiterated an outperform (buy) rating on the shares and raised the firm's price target from $120 to $140.

But the analyst didn't stop there. He predicted that Palantir's market cap, which is $260 billion at the time of writing, will hit $1 trillion in three years. Assuming the company maintains the same number of shares outstanding, that would imply a share price of over $400.

Image source: Getty Images.

Palantir is offering solutions that are proving indispensable for a modern enterprise, which is why investors have bid the shares up to dizzying heights over the past few years. Let's explore what is driving the company's growth and what it will take to send the company's market cap to the analyst's target.

Palantir is leading the new industrial revolution

Palantir continues to experience insatiable demand for its artificial intelligence (AI) platforms, and the reason is simple: It is helping businesses across the economy completely re-architect their data systems and operations around AI.

In the Q1 2025 shareholder letter, CEO Alex Karp said, "The rush toward large language models, as well as the foundational software architecture that is capable of making them valuable to large organizations, has turned into a stampede."

Palantir's total U.S. revenue grew 55% over the year-ago quarter. The company's AI boot camps continue to impress large corporations with what its software is capable of. Palantir noted several multimillion-dollar deals in the quarter, including one with a large healthcare company and another with a global bank.

Palantir is offering more than just software. It is building relationships as it works with major corporations to tailor its solutions to their needs, and those needs are very complicated. Nowhere are Palantir's capabilities better illustrated than in its work with the U.S. military. Palantir's software is trusted for executing special forces and other battlefield operations, where it analyzes information in real-time to facilitate fast decision-making.

The company's U.S. government revenue increased 45% year over year, driven by new deals with the Department of Defense. Internationally, it closed a deal to provide the Palantir Maven Smart System to advance NATO's military defenses.

Can Palantir's growth justify a $1 trillion market value?

Palantir's opportunity is well understood on Wall Street. But even using Wall Street's consensus revenue estimates, it's very difficult to justify the valuation required to send the stock to the analyst's $1 trillion market cap projection.

Palantir's trailing-12-month revenue is $3.1 billion, which puts the stock's current price-to-revenue multiple at 87. The consensus analyst estimate has revenue reaching $6.5 billion in 2027, but that still leaves the stock trading at an expensive forward revenue multiple of 40.

For perspective, the stock of AI chip leader Nvidia trades at 21 times revenue. Another top player in AI software, ServiceNow, trades at 18 times revenue. There are plenty of fast-growing AI companies out there that investors can buy at lower valuations.

For Palantir stock to hit $1 trillion in market value, investors would have to bid the stock up to an even higher valuation of 153 times 2027 revenue estimates. One way investors could perhaps justify this is if Palantir's revenue started doubling year over year. The problem with that is the company's own guidance calls for revenue to increase just 36% for 2025. That may not be enough growth to satisfy the stock's price tag.

At these valuation levels, I would consider investing in other top AI stocks. Any slip in management's execution or other headwinds to growth could send the stock plummeting from these highs.