Is Palantir the Premier Artificial Intelligence Stock for 2025?

Palantir (NASDAQ: PLTR) has quickly positioned itself as a leading choice among investors looking for artificial intelligence (AI) stocks. The company’s shares have more than quadrupled throughout 2024, creating a significant buzz around it.

However, amidst this remarkable success, an important question arises: Will Palantir continue to be a prime AI investment for 2025? In my view, the company is set up for potential growth in the upcoming year, but expectations reflected in its stock price might be too high.

Palantir's Market Potential

Palantir specializes in AI software that offers real-time data to decision-makers. While the company initially focused on government clients, it has successfully branched into the private sector as well.

One of Palantir's standout products is its Artificial Intelligence Platform (AIP), which enables companies to seamlessly integrate generative AI models into their existing workflows instead of relying on external third-party tools. This innovation represents a significant advancement in workplace AI integration, aiming to enhance employee efficiency and reduce errors.

The demand for AIP has driven Palantir's revenue to impressive heights, with a year-on-year increase of 30%, resulting in $726 million in revenue for Q3. Notably, its U.S. commercial business performed exceptionally well, achieving a 54% revenue surge to $179 million. Given that Palantir has only 321 U.S. commercial clients, there is substantial opportunity for further growth.

If Palantir can significantly increase its U.S. commercial client base and replicate its success with government and international clients, the stock could be embarking on a remarkable upward trajectory. This outlook represents the optimistic perspective for Palantir. Nevertheless, it’s essential to consider some critical issues at play.

Valuations outpacing Business Growth

The limited number of U.S. clients Palantir has can be traced back to the high cost of its software solutions. By annualizing the revenue from Q3 and divided by its customer count, we observe that, on average, each client generated $2.23 million in revenue. This suggests that companies using Palantir likely spend a minimum of $1 million annually on its services.

Such steep pricing limits Palantir's potential customer base because not many companies can afford to allocate significant budgets for AI software. Moreover, organizations with substantial financial resources might opt to develop similar functionalities in-house rather than investing in Palantir's offerings. Hence, if one envisions a scenario where tens of thousands of businesses will adopt Palantir's software over the coming decade, this assumption may need reconsideration.

Currently, Palantir's stock is trading at a striking 65 times sales and 358 times earnings. By comparison, popular AI stock Nvidia (NASDAQ: NVDA) has a valuation of 51 times earnings and 28 times sales, suggesting that Palantir's stock is significantly more expensive despite Nvidia’s faster growth.

To achieve Nvidia's current valuation, Palantir would need to exhibit remarkable growth, more than what is currently projected. For instance, if Palantir can accomplish the following:

• Boost its profit margin from 20% to 30%
• Maintain a company-wide revenue growth rate of 40%

Even under these optimistic conditions, it could take over four years for Palantir's stock price to reach a valuation comparable to Nvidia's (excluding the impact of stock-based compensation). This scenario anticipates four years of stagnant stock prices while expecting to sustain current growth rates.

Such assumptions may be unrealistic, especially given the limitation posed by the high cost of Palantir's products. Therefore, investors looking for promising AI stocks in 2025 might want to explore other alternatives, as numerous options appear to offer better value without the exorbitant expectations currently associated with Palantir.

Palantir, AI, Stocks