might the trajectory of this Artificial Intelligence (AI) company's stock soar further in the year 2025?
might the trajectory of this Artificial Intelligence (AI) company's stock soar further in the year 2025?
The main player in AI-driven stocks currently is Palantir Technologies (PLTR dropping by 3.72%). After hitting a low of about $6 per share during the 2022 market downturn, the company's AI tools have resulted in a more than 12-fold increase in its stock value within a couple of years.
This raises the question of whether this trend will persist in 2025. It's challenging to predict Palantir's future, but an analysis of its business and financials can provide some insight.
Palantir's Progression
The primary driver behind Palantir's stock surge is AI-driven productivity enhancements.
It's essential to note that Palantir's platforms have relied on AI since its early days. Both Gotham and Foundry have utilized this technology, even before investors fully comprehended its potential.
However, it reached new heights with the launch of its AI-generated platform (AIP) in 2023. Palantir showcased this technology to its clients through AIP boot camps, resulting in significant productivity gains for its users.
On the Q3 2024 earnings call, Palantir highlighted how an equipment rental company saw its average revenue retention (ARR) increase 12-fold. This product-driven growth attracted clients from various industries, leading to several seven-figure contracts with Palantir.
On the government side, Palantir reported its most significant sequential growth in 15 quarters. TITAN, the Army's next-generation intelligence ground station, contributed significantly to this growth. The company also praised the benefits of the Maven Smart System, which managed to match the performance of a 2,000-person targeting cell with just 20 people.
Palantir's Financials
Despite these achievements, the key concern for investors is the financial impact. The exuberance might be overblown, considering quarterly revenue growth has improved to 30% year over year. Over the first nine months of 2024, Palantir's revenue of $2 billion saw a 26% annual increase.
During this period, the company's operating expenses only increased by 9%. This led to a 229% rise in the net income attributable to stockholders for the first three quarters of the year compared to the same period in 2023.
Due to improved performance, Palantir increased its revenue forecast for 2024 to over $2.8 billion, up from the $2.75 billion range in the previous quarter. If this projection holds, the revenue growth rate will remain at 26%.
However, these gains might already be incorporated into the stock price – and then some. The stock has experienced a 12-fold increase in value over the past two years, a 300% rise in the last 12 months, and other factors suggesting overvaluation.
In particular, Palantir's trailing price-to-earnings (P/E) ratio is around 368. This valuation might not accurately reflect the stock's worth. Moreover, with a trailing price-to-sales (P/S) ratio of 67 and a forward sales multiple of 60, the stock shows signs of overvaluation. This sales multiple indicates the stock is priced for perfection, which could lead to a sell-off if growth rates fall short of expectations.
Will Palantir's exceptional growth continue in 2025?
Reflecting on Palantir's growth over the past 12 years, it's unlikely to see such increases in 2025.
While a tech-forward AI stock like Palantir can inspire optimism, investors often overlook high valuations in pursuit of growth potential.
However, paying 60 times forward sales represents a significant risk, regardless of the long-term growth prospects. Such high valuations can instill fear of a major correction, making purchasing the stock a risky move at the moment.
Despite the productivity gains brought by Palantir's software, its growth story may not end here. However, with much of its forecast growth already incorporated into the stock price, investors would be wise to keep Palantir on a watchlist rather than a buy list at present.
Investors might want to consider the potential financial implications of continuing to invest in Palantir Technologies, given its high price-to-earnings and price-to-sales ratios, which suggest overvaluation.
To make informed decisions about investing in Palantir, it's crucial to closely analyze its business and financials, including its revenue growth, net income attributable to stockholders, and operating expenses.