Palantir (PLTR -3.72%) has quickly emerged as a top artificial intelligence (AI) stock pick for many investors. The stock has more than quadrupled in 2024 and has a huge following.
But with all that success comes an obvious question: Is Palantir still a top AI pick for 2025? I think the business is primed to succeed in the coming year, but there are also some high expectations baked into the stock price.
Palantir's market has massive room for growth
Palantir makes AI software for its clients that provides the most up-to-date information possible to those with decision-making capabilities. This originally saw use in the government sector but has since expanded to the private sector.
One of Palantir's most promising products is its Artificial Intelligence Platform (AIP), which allows companies to integrate generative AI models into their workflows rather than using a third-party tool on the side. This is a huge step toward AI becoming more integrated at work, and it has the potential to make employees far more efficient and make fewer mistakes.
AIP demand has caused Palantir's growth rates to soar, with revenue rising 30% year over year to $726 million in Q3. However, its strongest segment by far was the U.S. commercial business, which saw revenue rise 54% to $179 million. Furthermore, the U.S. commercial customer count only sits at 321, so there's clearly a lot of room for growth.
If Palantir can capture far more U.S. commercial customers and spread that growth to the government and international clients, Palantir's stock could just be getting started on a huge run. At least, that's the bull case for the stock. However, there are some important caveats here that need to be addressed.
The stock has gotten far ahead of the business
There's a reason why Palantir's U.S. client list is relatively small: Its software is very expensive. If we multiply the U.S. Q3 revenue by four (to get an annual rate) and then divide that figure by its customer count, we get revenue per client. In Q3, that figure was $2.23 million. Now, that's the average cost per customer, but it seems reasonable to deduce that if you're using Palantir, you're spending a minimum of $1 million annually with the company.
That's a price tag that not many companies can afford, so Palantir's potential customer base is capped. Furthermore, companies with this kind of budget likely have access to significant technological resources and can build some of Palantir's offerings in-house. So, if you think tens of thousands of businesses will be signing up for Palantir's software over the next decade, you need to rethink your analysis.
The problem is that Palantir trades like those customers who have already signed up.
Right now, Palantir's stock trades for an astounding 65 times sales and 358 times earnings!
PLTR PS Ratio data by YCharts
Compared to the popular AI stock Nvidia (NASDAQ: NVDA), which trades at 51 times earnings and 28 times sales, it's far more expensive despite Nvidia growing at a significantly faster pace.
So, what kind of growth would Palantir have to put up to reach Nvidia's current valuation? Much more than it's showing now.
Let's say Palantir can achieve these two things:
- 30% profit margin (up from its current 20%)
- 40% companywide revenue growth
If it did that, it would take over four years for the stock price to rise to the same price valuation as Nvidia (excluding stock-based compensation effects). That's four years of the stock not changing in price, and increasing and sustaining its growth rate from current levels.
These assumptions don't add up, especially with the limiting factor of Palantir's product price. As a result, I think investors should look for a new AI stock for 2025, as there are far more attractive options out there that don't have ludicrous expectations baked into them.
