Is Palantir Stock a Buy Before 2025?

Palantir Technologies (NASDAQ: PLTR) has seen shares rise dramatically, increasing by 41% since November 5. The company is currently positioned at the intersection of two significant market phenomena: generative artificial intelligence (AI) and the influence of Donald Trump’s presidency. In this article, we’ll take a closer look at how these dynamics might impact Palantir’s future and its stock performance in 2025 and beyond.

AI Development

While generative AI became a hot topic with the introduction of OpenAI's ChatGPT in late 2022, Palantir has been focusing on big data analytics since its inception in 2003. This area involves the analysis of large quantities of information to identify trends, patterns, and actionable insights, which are crucial for various organizational needs, such as fraud detection and workflow optimization.

Big data analytics can be seen as an essential foundation for advanced tools like large language models, including ChatGPT. Palantir has quickly integrated generative AI capabilities into its existing platforms, enhancing their efficiency and providing real-time insights. These capabilities are particularly beneficial for military and law enforcement clients, allowing operators to pinpoint and analyze real-time threats during missions.

For instance, Palantir is currently assisting the Ukrainian armed forces in military targeting amidst its ongoing conflict with Russia. Additionally, the company has formed a partnership with Israel to develop technologies suited for combat scenarios.

Impact of Trump’s Administration

Palantir's business is inherently high-stakes, making it an attractive subject for speculation. The optimism surrounding Donald Trump's recent electoral success appears to have accelerated this hype, illustrated by the stock's significant rally. Many investors seem to view the new administration as a potential driver for growth.

In the third quarter, Palantir reported earnings of $320 million from U.S. government clients, which accounted for around 44% of its total revenue. This included substantial work with agencies like the Department of Defense and the Department of Homeland Security. During Trump’s previous time in office, Palantir was involved in significant immigration policy initiatives, notably assisting Immigration and Customs Enforcement (ICE) with deportations. With Trump’s promise of the largest deportation operation in U.S. history, there is speculation that Palantir could benefit from increased demand for its services.

However, it’s important to note that the exact benefits of Trump's agenda for Palantir remain ambiguous. The company’s relationship with ICE is managed through a software-as-a-service contract known as Falcon, which generated approximately $127 million over nine years—equating to about $14 million per year. This amount is relatively minor compared to Palantir’s expected sales of approximately $2.8 billion this year.

Moreover, there are reports suggesting that ICE may be looking to replace Falcon with a new tool known as RAVEn, which utilizes publicly available data rather than existing agency data.

In terms of foreign policy, Trump's previous administrations have generally favored strong military positions. However, there are indications he might prefer to de-escalate conflicts in Ukraine and the Middle East, which could lead to decreased military spending in 2025. Thus, investors should be cautious in forecasting a surge in demand for Palantir’s military offerings.

Evaluating Palantir’s Valuation

In its most recent quarter, Palantir's revenue grew by 30% year-over-year, reaching $726 million. Additionally, adjusted earnings before interest, taxes, depreciation, and amortization surged by 39%, totaling $283.6 million when including $142.4 million of stock-based compensation.

Despite these respectable results, they do not appear sufficient to justify the stock's high forward price-to-earnings ratio of 158. For comparison, the average forward P/E ratio for the S&P 500 is approximately 24, and even AI leader Nvidia trades at a forward P/E of just 30, despite having recorded a remarkable 94% growth in its revenue during its last quarter.

The valuation of Palantir seems disconnected from its underlying fundamentals. Moreover, the enthusiasm surrounding Trump's presidency is unlikely to catalyze growth for Palantir to the extent that many investors anticipate. As such, it may be prudent for shareholders to prepare for a potential decline in stock prices as 2025 approaches.

This article does not constitute investment advice. Always do your research before investing.

Palantir, AI, Stocks