Palantir (PLTR -3.72%) is one of the best-performing stocks of 2024. The analytics and software management platform for government agencies, the military, and big business is up 369% year to date and now sports a market cap of $183.4 billion. If you consider the company one of the American defense contractors, Palantir is officially the largest defense contractor in the world by market capitalization.
Shareholders of Palantir have appreciated the company's upward journey in 2024. Now, investors are looking at 2025. Can Palantir keep up this momentum? Time to dig into the fundamentals of this fast-growing company and find out.
Price momentum and business acceleration
Incredible returns like Palantir experienced in 2024 come from revenue growth acceleration. This creates price momentum, a phenomenon that says a stock is more likely to go up in the near term simply if the stock has recently gone up. It might seem counterintuitive or irrational, but it's backed up by decades of stock-price data.
In the last few quarters, Palantir has accelerated its annual revenue growth from 13% to 30%. Why? Because of the insatiable demand for the company's artificial intelligence (AI) analytical tools at large American corporations.
Commercial revenue in the United States was 54% last quarter, hitting a mark of $179 million for the segment. Analysts are betting this momentum will continue and lead to more strong consolidated revenue growth for Palantir.
The military and government revenue is doing well, too. Revenue from the U.S. government grew 40% year over year in the third quarter to $320 million. Palantir is used in the military, intelligence services, and other government agencies. While international revenue is a laggard, the U.S. commercial and government revenue is soaring for Palantir, which investors are betting will continue.
If revenue growth keeps accelerating in 2025 -- meaning Palantir beats Wall Street analyst expectations -- I bet that the stock will keep rising. Revenue acceleration is hard to bet against, at least in the short term.
The valuation is less than desirable
With increasing scale, Palantir is now generating healthy profits. Last quarter, GAAP (generally accepted accounting principles) net income margin was 20%, while its operating margin was 16%. With low fixed costs, it's likely that these margin figures will keep expanding over the next few years.
Over the last 12 months, Palantir has generated $2.65 billion in revenue. If this 30% revenue growth can continue, the company will reach $10 billion in annual revenue within the next five years or so. Apply a 30% profit margin to this figure, and you get $3 billion in annual earnings for this AI and software giant.
The problem is, Palantir's stock is already reflecting a lot of these optimistic estimates. In fact, these estimates may be too pessimistic for what Palantir's stock price indicates are investor expectations at the moment.
The company currently has a market cap of $183 billion, and if it hits $3 billion in net income, the stock will have a price-to-earnings ratio (P/E) of 61. This is double the S&P 500 average of 30. Remember, these are five-year forward estimates, while the S&P 500 figure is based on the last 12 months.
Looking at the valuation in another way, the stock has a trailing price-to-sales ratio (P/S) of 73.2. 2021 was the last time growth stocks -- and only a few of them -- traded at P/S ratios above 50. It didn't work out too well for investors who bought at these elevated sales multiples. Palantir's P/S ratio is one of the highest in history, so forward growth expectations are some of the highest ever.
PLTR PS Ratio data by YCharts.
Why next year doesn't matter
I don't have a crystal ball to see what Palantir's stock will do in 2025. However, if the company keeps accelerating revenue growth quarter after quarter -- which it's currently doing -- the stock will likely do well. Your guess is as good as mine as to whether this will happen, though. Every company, no matter how rock solid, has a bad quarter every once in a while.
Regardless of what you think about Palantir's near-term momentum, it shouldn't matter for investors who focus on buying and holding quality stocks for the long haul. What matters is the price you pay and how much in earnings/cash flow the company will generate for shareholders over the next five years, 10 years, and beyond.
Today, Palantir's market cap of $183 billion is wildly out of line with what it will earn in the future, even if revenue growth keeps accelerating. For this reason, investors should avoid buying shares of Palantir stock in 2025.
