Palantir Technologies(NASDAQ:PLTR) has witnessed a massive increase in market value in 2024 thanks to a remarkable 313% increase in the company’s share price so far this year.
The company has a market capitalization of $162 billion at the time of writing, up from about $35 billion at the start of the year. However, a closer look at Palantir’s valuation shows that this company may have gotten ahead of itself. The software platform specialist has a price-to-sales ratio of no less than 63, while the profit margin is 345.
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Not surprisingly, Wall Street doesn’t expect much upside from the stock in the coming year. The 20 analysts covering Palantir have an average 12-month price target of $38, which would be a 46% decline from current levels. If that does indeed happen, its valuation could drop significantly in the coming year.
Of course, the company may be able to justify its expensive valuation thanks to fast-growing demand for artificial intelligence (AI) software platforms, a market in which it is the leading player. But if cracks appear in Palantir’s growth story, especially as competition increases from larger and smaller players in the enterprise AI software space, investors are likely to book profits, sending the stock down.
This could pave the way Arm positions(NASDAQ:ARM) And Applied materials(NASDAQ: AMAT) to surpass Palantir’s valuation in the coming year. Let’s take a look at why these two companies could be worth more than Palantir in 2025.
With a market cap of just under $148 billion, Arm Holdings isn’t far off Palantir’s valuation. And Arm shares have delivered an impressive 87% return through 2024 thanks to the company’s important role in the global semiconductor market.
Arm licenses its architecture and intellectual property (IP) to semiconductor companies and consumer electronics manufacturers so they can develop various types of chips, such as central processing units (CPUs), graphics processing units (GPUs), and microprocessors, among others. The company’s chip architecture is used in multiple industries, including smartphones, data centers, computers and automakers.
Arm has a healthy market share in many industries. For example, in mobile applications it has a market share of more than 99%. The share of the consumer electronics chip market is 30%. In fact, it is gaining ground in fast-growing niches such as cloud computing and networking equipment, where it now has a market share of 15% and 28% respectively, up from 9% and 23% a few years ago.
And its share of the car chip market has risen from 43% to 47% in just a few years. In total, Arm estimates that its architecture and IP controls 47% of the $214 billion global chip market. The company expects to benefit from the growing complexity of chips deployed in its end markets thanks to the emergence of technologies such as AI.
And that’s why the company has seen an increase in demand for its architecture licenses. It ended the second quarter of fiscal 2025 with 39 Arm Total Access licenses, up from 33 in the previous quarter. The number of Arm Flexible Access licensees increased to 269 from 241 in the previous quarter.
This increase in the number of licenses sold bodes well, as chips developed with these licenses will result in royalty revenue. The company already gets about 50% of its royalty revenue from chip architectures launched more than a decade ago.
Management expects sales in the current fiscal year to increase to $3.95 billion from $3.23 billion in fiscal 2024, an increase of 22%. The earnings forecast of $1.55 per share would represent a 22% increase from the fiscal 2024 level of $1.27 per share.
The company’s growth is expected to accelerate in the coming fiscal year, with revenue expected to rise 25% to $4.93 billion and earnings expected to rise 32% to $2.05 per share. Analysts predict that this stronger growth will lead to more upside potential for the stock. The average 12-month price target of $160 would be a 14% jump from current levels.
As such, there’s a good chance it could overtake Palantir’s valuation next year, especially considering Arm’s earnings growth is then expected to be stronger than Palantir’s estimated net growth of 25%.
Applied Materials hasn’t set the stock market on fire in 2024, with a gain of just 13% so far this year, but 2025 could be much better for the company. Global spending on semiconductor equipment is expected to rise much faster at 24% in 2025, following a 4% increase this year, according to industry association SEMI.
Applied Materials sells manufacturing equipment and provides services and other software for the semiconductor and display industries. The company’s revenue in fiscal 2024 (which ended Oct. 27) rose just 2% to $27.1 billion. Adjusted earnings, on the other hand, rose 7% to $8.65 per share.
Consensus estimates predict a 9% increase in sales in the current fiscal year to $29.6 billion, along with a 10% increase in earnings to $9.54 per share. And there’s a good chance the company will see stronger growth thanks to rising demand for AI-related chip-making equipment.
Management said during its November earnings conference call that growing demand for memory capacity in AI data centers has led to a 60% increase in DRAM (dynamic random-access memory) device sales in fiscal 2024.
This trend is likely to continue as demand for high-bandwidth memory (HBM) deployed in AI data centers is expected to double next year. At the same time, Applied Materials will likely benefit from the transition to more advanced chipmaking technology to address AI workloads, which should substantially expand the addressable market.
All this tells us why analysts are optimistic about the company’s prospects for the year ahead. The stock has an average 12-month price target of $225, which would be an upside of 23%. Given its current market cap of nearly $151 billion, it won’t be surprising that it will overtake Palantir’s valuation in the coming year.
Applied Materials trades at just 19 times forward earnings. So if the market decides to reward its stronger growth with a richer valuation, the stock could easily deliver stronger gains than analysts estimate.
Consider the following before purchasing shares in Arm Holdings:
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Applied Materials and Palantir Technologies. The Motley Fool has a disclosure policy.
Prediction: 2 Stocks That Will Be Worth More Than Palantir Technologies in a Year was originally published by The Motley Fool
