Palantir (NASDAQ:PLTR) has quickly become one of the best artificial intelligence (AI) stocks for many investors. The stock will more than quadruple by 2024 and has a huge following.
But with all that success comes an obvious question: Is Palantir still a top AI pick for 2025? I think the company is poised to be successful in the coming year, but there are also some high expectations baked into the stock price.
Palantir makes AI software for its customers that provides the most up-to-date information to people with decision-making capabilities. This was originally used in the government sector but has since been extended to the private sector.
One of Palantir’s most promising products is its Artificial Intelligence Platform (AIP), which allows companies to integrate generative AI models into their workflows instead of using a third-party tool. This is a huge step towards greater integration of AI in the workplace, and it has the potential to make employees much more efficient and make fewer mistakes.
Demand for AIP has driven Palantir’s growth rates soaring, with revenue rising 30% year over year to $726 million in the third quarter. However, the strongest segment by far was the US commercial sector, where revenue rose 54% to $179 million. Furthermore, the number of commercial customers in the US is only 321, so there is clearly a lot of room for growth.
If Palantir can acquire many more U.S. commercial customers and spread that growth to government and international customers, Palantir’s stock could start to soar. At least that’s the bull case for the stock. However, there are some important caveats here that need to be addressed.
There’s a reason Palantir’s U.S. customer list is relatively small: its software is very expensive. If we multiply US third quarter revenue by four (to get an annual figure) and then divide that figure by the number of customers, we get revenue per customer. In the third quarter, that figure was $2.23 million. That’s the average cost per customer, but it seems reasonable to deduce that if you use Palantir, you’ll spend at least $1 million annually with the company.
That’s a price tag not many companies can afford, so Palantir’s potential customer base is limited. Additionally, companies with this type of budget likely have access to significant technology resources and can develop some of Palantir’s offering in-house. So if you think tens of thousands of companies will use Palantir’s software over the next decade, you should reconsider your analysis.
The problem is that Palantir is acting like the customers who have already signed up.
Right now, Palantir stock is trading for an astonishing 65 times sales and 358 times earnings!
Compared to the popular AI stock Nvidia (NASDAQ: NVDA)which trades at 51 times earnings and 28 times sales, it is much more expensive despite Nvidia growing significantly faster.
So, what kind of growth would Palantir need to experience to reach Nvidia? current valuation? Much more than it shows now.
Let’s say Palantir can achieve these two things:
If it did that, it would take more than four years for its stock price to rise to the same price valuation as Nvidia (excluding stock-based compensation securities). That’s four years of the stock not changing in price and increasing and maintaining its growth rate from current levels.
These assumptions are wrong, especially with the limiting factor of Palantir’s product price. As a result, I think investors should be on the lookout for a new AI stock for 2025, as there are far more attractive options that don’t have ridiculous expectations baked into them.
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Keithen Drury has positions at Nvidia. The Motley Fool holds and recommends positions in Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.
Is Palantir the Top Artificial Intelligence (AI) Stock for 2025? was originally published by The Motley Fool
