With shares up more than 333% over the last 12 months, Palantir Technologies (PLTR -0.59%) has been a massive beneficiary of generative artificial intelligence (AI), which many believe could revolutionize how people use and interact with big data. But could the AI boom become the AI doom? Let's discuss how issues like competition and overvaluation could stop Palantir's rocket ship rally in 2025 and beyond.
AI before it was trendy
Palantir specializes in big data analytics, which involves sifting through large volumes of information to uncover valuable insights. Founded in 2003, it is an early AI company because big data analytics is a precursor to the generative AI behind large language models (LLMs) such as ChatGPT, which exploded onto the scene in late 2022.
Palantir quickly recognized the value of generative AI and implemented it into its existing software-as-a-service (SaaS) offerings. A great example of this is with the military, where management claims that its new Artificial Intelligence Platform (AIP) can help operators in the field identify and target enemy equipment in real time. Government clients are quickly adopting the new technology for their missions.
In May, the company was awarded a $480 million deal to help the Department of Defense develop its Maven Smart System, an AI platform that integrates various data sources to improve battlefield awareness and decision-making. It has also won contracts with the governments of Israel and Ukraine for the use of its military-related software services in their respective wars.
Growth is decent but not great
Palantir's third-quarter earnings reveal healthy (but not spectacular) operational expansion. Total revenue grew 30% year over year to $726 million as it closed 104 large deals (those worth more than $1 million).
And the company reported adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $283.6 million. But this figure adds back $142.4 million in stock-based compensation.
That kind of compensation can be a double-edged sword. While it helps young companies maintain cash reserves and motivate employees by giving them a stake in the company's success, it dilutes shareholders' ownership claim on the business.
Palantir is currently spending around half of its adjusted EBITDA and 99% of its net income attributable to common stockholders on stock-based compensation, which doesn't look like an attractive situation for long-term investors.
Image source: Getty Images.
Furthermore, there is also no guarantee that the company can maintain or improve its current growth rate. Despite enjoying significant hype, the company doesn't seem to have any secret sauce that rivals can't replicate.
When it comes to big data analytics, Microsoft offers a similar SaaS platform called Fabric. And it likely has access to more-advanced LLM models because of its close partnership with industry leader OpenAI. Over time, competition from other data analytics providers could become a serious threat to Palantir's growth and profit potential.
Its shares are overvalued
Palantir's current valuation doesn't seem to price in its potential challenges. With a forward price-to-earnings multiple (P/E) of 164, shares are valued at more than 5.6 times the S&P 500 average of 29. And the stock is significantly pricier than faster-growing AI-related companies like Nvidia, which recently traded for just 33 times forward earnings despite seeing its revenue grow 94% in its most recently reported quarter.
Financial markets can be illogical and speculative, so it is impossible to know how long Palantir will continue trading at such elevated levels. That said, the company's valuation doesn't seem to have a fundamental basis, making shares look likely to underperform in 2025 and beyond.
