Investors should pay close attention to Palantir Technologies (PLTR) in 2025 as its stock shows signs of disconnect from its underlying business fundamentals. Following a remarkable 2024 with a 356% stock increase, much of the gain appears linked to hype around its AI capabilities rather than actual business performance.
Investors wary of Palantir’s stock disconnect from fundamentals
Palantir specializes in software that processes large volumes of information to provide actionable insights in real-time. Initially focused on government contracts, Palantir has successfully expanded into the commercial sector, primarily driven by demand for its Artificial Intelligence Platform (AIP). This platform integrates AI into clients’ operations, enhancing its appeal beyond standalone tools. In Q3 2024, the company’s revenue rose 30% year-over-year to $726 million, with U.S. commercial revenue seeing an impressive 54% increase to $179 million. Palantir’s limited customer base of 321 U.S. commercial clients suggests significant growth potential.
However, the cost of Palantir’s software is a crucial factor. The annualized average revenue per U.S. commercial client is approximately $2.23 million, indicating that only a limited number of companies can afford this premium service. Alternatives such as outsourcing AI projects to consulting firms or developing in-house solutions pose additional competition, potentially limiting Palantir’s growth unless it introduces a more affordable product line.
Palantir’s $100 stock price target may be closer than you think
Concerns about valuation
Palantir’s stock valuation has raised concerns among analysts. Currently, it trades at 378 times earnings and 69 times sales, starkly contrasting with Nvidia, which has never exceeded 247 times earnings and 46 times sales despite significant revenue growth. If Palantir sustains a 30% revenue growth rate over the next five years and achieves a 30% profit margin, it would still only justify trading at 60 times earnings—considered expensive by industry standards—at current stock prices. Analyst estimates show a projected revenue growth of only 24% for the next year, suggesting that existing valuations are overly optimistic.
As of now, Palantir’s market capitalization sits at $167 billion, with a trailing price-to-earnings ratio exceeding 60, based on future earnings potential of $3 billion by 2029. This figure is nearly three times greater than the S&P 500’s forward price-to-earnings ratio of 22. Furthermore, the stock’s price-to-sales ratio of 68 represents some of the highest valuations historically seen in the growth stock arena, raising the risk for prospective investors.
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Featured image credit: Kerem Gülen/Ideogram
