After a tremendous 2024, when it rose 340%, Palantir (PLTR 3.38%) hasn't had nearly as great a 2025. To start the year, the stock has dipped more than 10% at the time of writing. Given how hot an artificial intelligence (AI) stock Palantir is, many investors might wonder if this dip is a buying opportunity.
Palantir is certainly growing quickly and has a fantastic product, but one thing gives me pause as a potential investor.
Palantir has a widely diversified customer base
Palantir has been in the AI game longer than most companies. It was founded in May 2003 and was specifically created to provide AI solutions to government clients. That turned out to be a massive success, and the company eventually expanded into the commercial side.
Palantir's software essentially takes data in, processes it through a custom-built AI platform for each client, and then displays this information on a dashboard so that those with decision-making authority (be it in the military or at an insurance company) can make the most informed decision possible. That was the original premise of Palantir's software, but its latest product has driven massive demand, especially in the U.S. commercial sector.
Palantir's Artificial Intelligence Platform (AIP) gives its users the tools they need to integrate AI models into workflows rather than something that is used on the side. Furthermore, AIP has the ability to integrate AI agents to automate tasks that humans normally do. With many prominent AI CEOs declaring that 2025 will be the year of agentic AI, Palantir is a stock to watch as it is one of the leaders in this space.
With a leading product in an important space, it's no wonder Palantir's growth has been solid. In Q3, Palantir's total revenue rose 30% year over year to $726 million. However, the U.S. commercial sector saw faster-than-average growth, with revenue rising 54% year over year to $179 million. Even U.S. government revenue exceeded the mean, as it was up 40% year over year to $320 million.
Clearly, the U.S. is outpacing the rest of the globe's demand for AI software, and a key part of the Palantir investment thesis is that the rest of the world will eventually have similar AI demand as the U.S. Still, there's plenty of room to grow in the U.S.
While Palantir has reached most of its government clients, it has only scratched the surface of its U.S. commercial potential. It only has 321 U.S. commercial clients, so there's clearly room for expansion.
There's still a lot of growth left for Palantir, but the stock has one glaring problem.
The stock may need a deeper sell-off before its price can be justified
Although all of this growth looks promising, the issue is that it's already baked into the stock price. Let's take the bull case, which might state that Palantir's revenue growth will accelerate to 40% year over year due to capturing international business as well as signing more U.S. commercial clients.
If Palantir maintains that 40% growth rate for the next five years alongside its current 20% profit margin, it will produce $14.2 billion in revenue and $2.85 billion in profits. While that's incredible growth, Palantir's stock would trade at 53 times trailing earnings if the stock price did not move from today's levels.
PLTR Revenue (TTM) data by YCharts
For reference, Nvidia (NVDA 3.40%), a company that's expected to grow sales by 52% next year, trades for 52 times earnings right now. Wall Street analysts only expect Palantir's revenue to grow by 25% in 2025, so the 40% annual growth for five years is an extremely bold and likely wrong prediction. As a result, even attaining the price-to-earnings (P/E) ratio I outlined above would be incredibly difficult.
There's just too much growth baked into the stock right now to justify the price tag, and I wouldn't be surprised if this selling continues. While Palantir will be a massive winner as a company in the AI arms race, there's no way to justify the current price tag with the growth it's delivering.
