Assessing Palantir Stock: Is It a Good Buy Before 2025?

Palantir Technologies (NASDAQ: PLTR) has seen a significant price increase of 41% since November 5th. The company's stock is currently influenced by two major trends: the rise of generative AI technology and the potential return of Donald Trump to the presidency. Understanding how these trends could impact Palantir's future prospects is essential for investors looking toward 2025 and beyond.

The Early Days of AI

Artificial Intelligence (AI) gained widespread attention with the launch of OpenAI's ChatGPT in late 2022. However, Palantir has been operating in the related field of big data analytics since its establishment in 2003. This sector focuses on analyzing large sets of data to identify trends and patterns that businesses and organizations can act upon, ranging from fraud detection to workflow optimization.

Big data analytics serves as a stepping stone toward the development of large language models (LLMs), such as ChatGPT. In response to the growing demand for AI solutions, Palantir has integrated generative AI capabilities into its platforms, enhancing their effectiveness in providing real-time insights.

Such advancements are particularly vital for clients in the military and law enforcement sectors. For instance, Palantir’s software assists military operators in identifying real-time threats during missions. The company has been actively involved in supporting the Ukrainian military amid its ongoing conflict with Russia and partnered with Israel for combat-related technological initiatives.

The Impact of Trump

Palantir’s unique business model lends itself to hype, especially in light of the possible return of Donald Trump as President. Following the recent spike in stock value, many investors view Trump’s leadership as a potential catalyst for growth in Palantir's operations. In the third quarter alone, the company generated approximately $320 million (around 44% of total sales) from U.S. government contracts, notably from the Department of Defense and the Department of Homeland Security.

During Trump’s previous administration, Palantir was notably involved in immigration policy, collaborating with Immigration and Customs Enforcement (ICE). The new administration has signaled plans to intensify these immigration efforts, with Trump promising a historic level of deportations.

However, it's critical to understand the limitations of this potential opportunity. According to sources, Palantir has earned only $127 million from its partnership with ICE over nearly a decade. This amounts to approximately $14 million annually, which is relatively insignificant when compared to Palantir's anticipated total revenue of around $2.8 billion this year.

Furthermore, there are reports indicating that ICE may replace Palantir’s services with a custom tool called RAVEn, which is designed to gather publicly accessible data rather than utilize existing data. Additionally, while historical administrations have favored increased military spending, Trump’s current inclination is to reduce U.S. involvement in ongoing conflicts, making significant growth in military contracts uncertain for 2025.

Evaluating Palantir's Financial Health

For investors, examining the financial fundamentals of Palantir is crucial. In the third quarter, the company reported a revenue growth of 30% year-over-year, reaching $726 million, while its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased by 39% to $283.6 million. This figure accounts for $142.4 million in stock-based compensation.

While these financial outcomes are positive, they fall short of expectations considering the company’s high valuation. Palantir’s forward price-to-earnings (P/E) ratio stands at a staggering 158. For comparison, the S&P 500 has an average forward P/E ratio around 24, while industry leader Nvidia trades at just 30 times its expected earnings, showcasing a significantly more robust growth rate of 94% in its latest quarter.

This stark discrepancy indicates that Palantir's current valuation may not align with its actual performance metrics. Considering the uncertainties surrounding Trump's presidency and its anticipated effect on Palantir’s growth trajectory, investors should be prepared for the possibility that the stock price may decline as investors reassess the company's true market value by 2025.

The author has no financial interest in any of the stocks mentioned. The author intends to provide a balanced view without promoting any single viewpoint or recommendation.

Palantir, Stock, AI