To say so would be an understatement Palantir Technologies(NASDAQ:PLTR) The shares have been in good form on the market in 2024, as the software platform specialist’s shares are up as much as 290% this year at the time of writing.
Last month alone has been a banner one for Palantir investors, as the stock has risen 62% since reporting third-quarter results on November 4. Artificial intelligence (AI) has played a defining role in this red-hot rally, as companies and corporate governments have flocked to Palantir to help them integrate generative AI into their operations, helping the company accelerate its growth and build a robust revenue pipeline build up.
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However, Wall Street doesn’t expect Palantir shares to maintain their momentum through 2025. Let’s see why.
The 20 analysts covering Palantir have a one-year price target of $38 for the stock. That indicates a decline of 43% from current levels. Something else worth noting is that 35% of analysts recommend selling Palantir stock. Half of them have a ‘hold’ rating, while only 15% recommend buying it.
Furthermore, the Street-high price target of $75 suggests that Palantir stock could rise just 12% over the next year from where it is today. Valuation is one of the main reasons why analysts aren’t predicting much upside for Palantir stock. After all, Palantir now trades at a whopping 62 times revenue. The rolling price-to-earnings (P/E) ratio is 342. While the forward earnings multiple of 137 indicates an improvement in operating income, it is still very rich.
It’s worth noting that these multiples are much higher than those of the AI ​​pioneer Nvidiaa company that has grown much faster than Palantir. For example, Nvidia’s revenue rose an impressive 94% year over year to $35.1 billion in the last quarter. Earnings, meanwhile, rose 103% to $0.81 per share.
Palantir, on the other hand, reported a 30% increase in revenue in the third quarter to $726 million. The company’s adjusted earnings rose 43% from the same period last year to $0.10 per share. Of course, this isn’t an ideal comparison, as Nvidia is primarily a hardware company that is also finding success with AI software, while Palantir is a pure software vendor.
The fact that Nvidia, despite its larger size, is growing at a much faster pace and trading at a much lower 32 times forward earnings compared to Palantir makes the former a much more logical AI stock to invest in now. Furthermore, Palantir’s valuation carries the risk of a major sell-off if cracks appear in the growth story, meaning the country will have to continue delivering stronger growth quarter after quarter to justify its rich numbers.
While there’s no doubt that Palantir’s valuation suggests the stock has gotten ahead of itself, there are a number of things working in the company’s favor that could be a tailwind for the stock next year.
First, Palantir’s revenue growth has improved in every quarter of 2024. Sales rose 21% year-on-year in the first quarter, followed by a 27% increase in the second quarter. We’ve already seen a 30% increase in revenue last quarter, driven by robust demand for the company’s AI software platform.
The second reason why Palantir could continue its impressive rally is its impressive customer base and deal size growth, which will allow the company to build a healthy long-term revenue pipeline. More specifically, there was a 39% increase in Palantir’s customer base last quarter. The number of $1 million deals signed by the company rose to 104 from 80 in the same period a year ago.
As a result, the residual deal value (RDV) of Palantir’s contracts rose 22% to $4.5 billion last quarter. Given that this metric refers to the total remaining value of contracts the company was still on at the end of the quarter, the impressive growth suggests that Palantir is positioned to grow its revenue at a nice pace over the long term. continue to grow.
The third reason why Palantir still appears attractive to growth investors is its strong unit economics. The company’s non-GAAP operating margin was 38% in the third quarter, compared to 29% in the same period last year. Unit economics refers to the profit a company makes on each customer or product it sells, after deducting costs.
Favorable economics indicate that Palantir is now making more money from its customers, and that’s not surprising. During the company’s earnings conference call in November, management provided several examples of customers expanding their contracts after signing up to use the solutions. This trend could continue in the future as the AI ​​software platform market is currently in an early growth phase.
IDC predicts that spending on AI software platforms could increase from $27.9 billion in 2023 to $153 billion in 2028. As a result, adoption of Palantir’s offering is likely to improve further in the long term, and strong economic conditions of the unit should ideally make this possible. maintain its impressive earnings growth.
The above factors explain why analysts have increased their earnings growth expectations of Palantir for 2025 and 2026.
PLTR EPS estimates for next fiscal year data according to YCharts
If Palantir manages to continue to beat analyst expectations and deliver stronger revenue and profit growth in the coming year, there’s a good chance it can justify its valuation and ride higher in 2025. Conservative investors, however, would. It’s good to look at other options if they want to benefit from the AI ​​boom, as Palantir’s expensive valuation makes the company prone to volatility.
Consider the following before purchasing shares in Palantir Technologies:
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.
Where Will Palantir Technologies Stock Be in 1 Year? was originally published by The Motley Fool
