Considering Palantir's Stock Potential Before 2025?
With an increase of 41% in shares since November 5, Palantir Technologies (PLTR -3.72%) finds itself at the intersection of two significant stock market trends: generative AI and the Trump presidency. Let's delve into how these potential avenues could evolve for the data analytics company in 2025 and beyond.
AI before it was trendy
AI gained mainstream popularity following OpenAI's ChatGPT launch in late 2022, but Palantir has been working with a related technology, big data analytics, since its inception in 2003. This field involves processing large quantities of data to identify trends, patterns, and valuable insights. It aids organizations in combating fraud, optimizing workflows, and detecting potential threats.
Big data analytics serves as a precursor to large language models (LLMs) such as ChatGPT. Palantir swiftly incorporated generative AI capabilities into its legacy platforms to enhance their efficiency and deliver real-time insights. These enhancements are particularly beneficial for military and law enforcement clients, as Palantir's software can help operators in real-time threat identification.
Palantir's AI has been instrumental in aiding the Ukrainian armed forces with military targeting during their conflict with Russia. In June, Palantir partnered with Israel to develop combat-related technology.
The Trump effect
Palantir's strategically-oriented business model invites speculation. However, Donald Trump's win seems to have intensified the hype. The stock's 41% surge since November 5 suggests that many investors view the new administration as a possible growth catalyst.
In the third quarter, Palantir recorded $320 million in sales (approximately 44% of total sales) from U.S. government clients, including the Department of Defense and the Department of Homeland Security. During the Trump administration, Palantir played a significant role in immigration policy, supporting Immigration and Customs Enforcement (ICE) with deportations. The current administration aims to escalate these efforts, with Trump promising the largest deportation in U.S. history.
However, it remains uncertain how much Trump's agenda will actually benefit Palantir, which works with ICE through a software-as-a-service (SaaS) contract called Falcon. Business Insider reports that Palantir earned only $127 million from the contract between 2013 and 2022, equating to approximately $14 million per year – a relatively small sum for a company targeting $2.8 billion in sales this year.
Moreover, ICE is reportedly considering replacing Falcon with a custom-built tool called RAVEn, which would mine publicly available data instead of working with existing data within ICE's possession. Additionally, while previous Republican presidents have generally advocated for a hawkish foreign policy, Trump signaled an intent to de-escalate conflicts in Ukraine and the Middle East. Palantir investors should thus be cautious about anticipating a significant increase in military spending in 2025.
Does Palantir's valuation match its performance?
Palantir reported a 30% year-over-year revenue growth to $726 million in the third quarter, while adjusted earnings before interest, taxes, depreciation, and amortization increased by 39% to $283.6 million (including $142.4 million in stock-based compensation).
While these figures are noteworthy, they may not be exceptional or robust enough to justify the stock's forward price-to-earnings ratio of 158. The S&P 500 typically has a forward PE estimate of 24, and AI leader Nvidia trades for 30 times expected earnings, despite posting 94% growth in its latest quarter.
Palantir's valuation appears to be detached from its financial performance. Trump's presidency may not contribute as much to the company's growth potential as the market seems to believe. Investors should prepare for a correction in Palantir's stock price in 2025.
In the context of Palantir's financial strategy, many investors see potential growth opportunities due to the Trump presidency, which could potentially boost the company's sales, as seen by the 41% increase in shares since November 5. To capitalize on this potential growth, investors might consider diversifying their portfolio by investing in Palantir.
Given Palantir's robust third-quarter financial performance with a 30% revenue growth and a 39% increase in adjusted earnings, some investors might be interested in incorporating Palantir's stock into their investment portfolios. However, considering the stock's forward price-to-earnings ratio of 158, which is significantly higher than the S&P 500's forward PE estimate of 24, it's essential for investors to carefully evaluate whether Palantir's valuation is justified by its financial performance before making an investment decision.
