Palantir Technologies (PLTR -2.52%) was one of the hottest artificial intelligence (AI) stocks of 2024. Its stock jumped 340% in 2024, meaning it more than quadrupled in value in just one year. That extraordinary performance isn't common, but with all of the tailwinds in the AI space, some investors are wondering if Palantir's stock price could double in value in 2025.
An examination of one metric regarding Palantir suggests that this level of performance is possible (but unlikely), and shareholders should take notice of it to determine what to do with their holdings. Potential investors considering the stock might also be interested.
Palantir's software has found a use case in multiple fields
Palantir is an AI company that provides purpose-built solutions for its clients. Originally, its target audience was government entities, but that eventually expanded to include commercial customers. The primary use of its software is to run large amounts of data through pre-built AI models, and then present its findings to those with decision-making authority. This gives those people the best information possible at the time with which to make a decision.
One of the latest additions to Palantir's product line is its Artificial Intelligence Platform (AIP). AIP is Palantir's answer to the generative AI trend. AIP allows its users to integrate AI models into a business's inner workings and automate many processes. It also includes a feature for AI agents to perform tasks that were once done by people, further solidifying its use case.
AIP has driven a massive spike in demand for Palantir's software, especially on the U.S. commercial side of its business. In Q3, Palantir's total revenue increased at a 30% clip to $726 million, while U.S. commercial revenue rocketed 54% higher to $179 million. Clearly, the U.S. commercial business isn't Palantir's largest segment, but it is the company's fastest-growing one.
Alongside its strong growth, Palantir is profitable, consistently producing around 20% profit margins.
PLTR Profit Margin (Quarterly) data by YCharts.
While some other software companies' profit margins can surpass 30%, 20% is still a noteworthy figure, as it shows that management values profitability alongside growth.
Those are some strong financial results, but do they add up to a company that can double its market cap in 2025?
Palantir's valuation could hinder its stock's success in 2025
It's hard to debate that Palantir isn't a fantastic company that's succeeding in the AI arms race. However, the market has seen this success as outright dominance and bid up the stock to unreasonable levels. Palantir's revenue increased 30% year over year this last quarter, but the stock rose 340% for the year. Something doesn't add up there, and the disparity appears in Palantir's valuation.
A stock's valuation gives investors a relative idea of how much the market is willing to pay for a piece of a company. While this means nothing by itself, it is extremely useful when comparing stocks. Most software stocks trade between 10 and 20 times sales. Palantir trades at 69 times sales.
Data by YCharts.
Investors are paying a massive premium for Palantir's stock over other software companies that are growing just as fast as it is. Is this premium worth it? I'd say no.
AI hardware king Nvidia posted multiple quarters in a row where its revenue more than tripled year over year. However, Nvidia never traded for more than 46 times sales during that run. With Palantir's valuation well higher than that despite far slower growth, it's safe to assume that the stock may be in a bubble.
As a result, I don't think the stock will double in 2025. In fact, I wouldn't be surprised to see it decline throughout the year. While Palantir, the company, is doing fantastic and will continue to produce great results in 2025, Palantir, the stock, has already baked in years of growth, and there isn't much upside left.
