Being a successful investor requires only a few skills: knowing when to buy and knowing when to sell. Although it sounds simple, you will get incredible returns if you are the best at both. There’s one hot artificial intelligence (AI) stock that was a buy at the start of the year but has now moved into the sell category. That is Palantir (NASDAQ:PLTR).
Palantir was an incredible success in 2024, with its stock price more than quadrupling. However, the shares are disconnected from the business, and I think there’s a good chance they’ll fall back to the ground in 2025. As a result, it is best for investors to take their profits and run.
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The unfortunate thing about Palantir’s business and stock becoming disconnected is that it is doing incredibly well and will likely maintain that status quo into 2025 and beyond.
Palantir’s application-specific AI models help their customers with decision-making and are widely used in the commercial and government sectors. One of the newer products that has quickly emerged as one of the most popular is the Artificial Intelligence Platform (AIP). With AIP, customers can build AI applications into their workflows instead of using them as a tool. This allows companies to control the data plugged into these AI models, rather than passing it to a third-party AI platform, which could pose a problem when using sensitive information that the government deals with.
Since the start of the AI ​​arms race, Palantir’s AI products have seen tremendous demand, which has translated into strong performance for the company.
In the third quarter, Palantir’s revenue rose 30% year over year to $726 million. U.S. customers spent more than their international counterparts, with U.S. commercial revenues up 54% year-over-year to $179 million and U.S. government revenues up 40% year-over-year to $320 million. Palantir is also solidly profitable, with a profit margin of about 20% for the second quarter in a row.
PLTR profit margin data (quarterly) according to YCharts
With this information alone, it’s understandable why Palantir has received a lot of investment interest. It is growing rapidly in an area that investors are currently focusing on.
Palantir is doing incredibly well as a company and I predict strong results through 2025. The problem is that the stock has moved away from these fundamental results.
As mentioned earlier, Palantir shares are up over 300%, but revenue growth is a tenth of that. As a result, the stock has become highly valued and is trading at an incredible valuation.
PLTR PS Ratio data according to YCharts
At 64.5 times revenue, Palantir has eclipsed the top tier Nvidia traded at over the past three years (45 times sales). This has been achieved despite significantly lower profit margins and much slower growth. When Nvidia reached that valuation, it tripled its revenue the following quarter. At Palantir’s current growth rate (30%), it would take more than four years to triple its revenue.
Not a single part of Palantir’s valuation makes sense, which is a shame because the company is doing so well.
Let’s take a moment to assess the absolute best-case scenario for Palantir. It would include these factors:
Sales growth accelerates to 40%.
Profit margin increases from 20% to 30% to match the software leader Adobe.
It trades for 50 times current earnings.
The effects of stock-based compensation are ignored (this is a terrible assumption, considering Palantir’s share count is up 3.5% over the past year thanks to hefty stock-based compensation).
If Palantir were to achieve these four points, its stock price would need to remain at current levels for more than four years to reach its 50x earnings valuation. These are all extremely aggressive assumptions that are unlikely to come to fruition, further illustrating how expensive Palantir stock has become.
As a result, I think there is a very good chance that Palantir stock will crash ever in 2025. There is simply too much growth baked into the stock for current growth levels, and investors will eventually decide to take profits en masse, which will result in the stock struggling even if the company does well.
Consider the following before purchasing shares in Palantir Technologies:
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Keithen Drury holds positions at Adobe. The Motley Fool holds positions in and recommends Adobe, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.
Prediction: This Hot Artificial Intelligence (AI) Stock Will Fall Hard by 2025 Originally published by The Motley Fool
