It would be an understatement to say that Palantir Technologies (PLTR 0.47%) stock has been in fine form on the market in 2024, as shares of the software platform specialist have shot up a stunning 290% so far this year as of this writing.
The past month alone has been a terrific one for Palantir investors as the stock has zoomed 62% since releasing its third-quarter results on Nov. 4. Artificial intelligence (AI) has played a defining role in this red-hot rally as enterprises and governments have been flocking to Palantir to help them integrate generative AI into their operations, helping the company accelerate its growth and build a robust revenue pipeline.
Wall Street, however, isn’t expecting Palantir stock to sustain its momentum in 2025. Let’s see why.
Palantir Technologies’ valuation is too rich right now
The 20 analysts covering Palantir have a one-year price target of $38 on the stock. That points toward a 43% drop from current levels. Another thing worth noting is that 35% of the analysts recommend selling Palantir stock. Half of them have a “hold” rating, while only 15% recommend buying it.
Moreover, the Street-high price target of $75 suggests that Palantir stock could jump only 12% from where it is right now in the next year. The valuation is one of the main reasons why analysts aren’t projecting much upside in Palantir stock. After all, Palantir is now trading at a whopping 62 times sales. Its trailing price-to-earnings (P/E) ratio stands at 342. While the forward earnings multiple of 137 points toward an improvement in its bottom line, it is still very rich.
It is worth noting that these multiples are way higher than AI pioneer Nvidia, a company that has been growing at a much faster pace than Palantir. For instance, Nvidia’s revenue in its latest quarter increased an impressive 94% year over year to $35.1 billion. Its earnings, meanwhile, jumped 103% to $0.81 per share.
Palantir, on the other hand, reported a 30% increase in revenue in Q3 to $726 million. The company’s adjusted earnings increased by 43% from the year-ago period to $0.10 per share. Of course, this is not an ideal comparison as Nvidia is primarily a hardware company that’s also finding success in AI software, while Palantir is a pure-play software provider.
However, the fact that Nvidia is growing at a much faster pace despite its bigger size and is trading at a much lower 32 times forward earnings when compared to Palantir makes the former a much more logical AI stock to invest in right now. Moreover, Palantir’s valuation puts it at risk of a major sell-off in case there are any cracks in its growth story, which means that it will have to continue delivering stronger growth quarter after quarter to justify its rich multiples.
Is 2025 going to be a difficult year for this AI stock?
While there is no doubt that Palantir’s valuation suggests that the stock may have run ahead of itself, there are a few things that are working in the company’s favor and could be tailwinds for the stock next year.
First, Palantir’s revenue growth rate has improved in each quarter of 2024. Its top line was up 21% year over year in Q1, followed by a 27% increase in Q2. We have already seen that it clocked a 30% revenue jump last quarter, driven by the robust demand for the company’s AI software platform.
The second reason why Palantir may be able to sustain its impressive rally is the impressive growth in its customer count and deal size, which are allowing it to build a healthy long-term revenue pipeline. More specifically, there was a 39% increase in Palantir’s customer count last quarter. The number of $1 million deals signed by the company increased to 104 from 80 in the year-ago period.
As a result, the remaining deal value (RDV) of Palantir’s contracts increased by 22% to $4.5 billion last quarter. Considering that this metric refers to the total remaining value of contracts the company was sitting on at the end of the quarter, its impressive growth suggests that Palantir is in a position to keep growing its revenue at a nice pace in the long run.
The third reason why Palantir may still seem attractive to growth investors is its strong unit economics. The company’s non-GAAP operating margin in Q3 stood at 38%, up from 29% in the same period last year. Unit economics refers to the profit made by a company from each customer or product it sells after deducting expenses.
Favorable unit economics suggest that Palantir is making more money from its customers now, and that’s not surprising. In the company’s November earnings conference call, management gave several examples of its customers expanding their contracts after signing up to use its solutions. That trend could continue in the future as the AI software platforms market is currently in its early phases of growth.
IDC forecasts that the spending on AI software platforms could jump from $27.9 billion in 2023 to $153 billion in 2028. As a result, the adoption of Palantir’s offerings is likely to improve further in the long run, and its strong unit economics should ideally allow it to maintain its impressive earnings growth.
The above factors explain why analysts have increased their earnings growth expectations from Palantir for 2025 and 2026.
PLTR EPS Estimates for Next Fiscal Year data by YCharts
If Palantir manages to continue outperforming analysts’ expectations over the next year and attains stronger levels of revenue and earnings growth, there is a good chance that it may be able to justify its valuation and head higher in 2025. Conservative investors, however, would do well to look at other options if they are looking to capitalize on the AI boom, as Palantir’s expensive valuation makes it prone to volatility.
