Is Palantir Positioned as the Leading Artificial Intelligence (AI) Share for 2025?
Is Palantir Positioned as the Leading Artificial Intelligence (AI) Share for 2025?
Palantir (PLTR shedding -2.40%) has swiftly established itself as a preferred artificial intelligence (AI) investment for numerous investors. The stock has skyrocketed over 4x in 2024, garnering a substantial fanbase.
However, given its success, a pertinent query arises: Is Palantir still a top AI pick for 2025? While I believe the company is poised for success in the coming year, the stock's value contains elevated expectations.
Palantir's market boasts ample expansion potential
Palantir creates AI software for its clients, offering them the most recent data feasible to decision-makers. Initially, this technology found use within government sectors, yet it has since extended to the private sector.
One of Palantir's most promising products is its Artificial Intelligence Platform (AIP), which empowers businesses to incorporate generative AI models into their workflows, instead of relying on external tools. This is a significant stride towards AI integration in the workplace, potentially enhancing employee efficiency and reducing errors.
The surge in AIP demand has escalated Palantir's growth rates. In Q3, revenue escalated 30% year-over-year to hit $726 million. The most exciting segment was the U.S. commercial business, where revenue climbed 54% to $179 million. Moreover, the count of U.S. commercial clients stands at merely 321, therefore, there remains substantial growth potential.
If Palantir can amass more U.S. commercial clients and propagate this growth to the government and international clients, Palantir's stock could be embarking on a monumental growth spree. At least, that's the optimistic viewpoint for the stock. However, there are crucial factors that warrant consideration.
The stock has surpassed the business by a significant margin
The primary reason for Palantir's modest clientele in the U.S. is its steep pricing. 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. During Q3, that figure was $2.23 million. It's reasonable to speculate that if you're employing Palantir, you're shelling out a minimum of $1 million annually with the company.
This is an exorbitant cost that not many companies can afford, thereby limiting Palantir's potential customer base. Moreover, companies with such budgets have the resources to construct some of Palantir's offerings in-house. Consequently, if you expect tens of thousands of businesses to adopt Palantir's software over the next decade, reconsider your analysis.
The problem is that Palantir's stock price mirrors those customers who have already signed up.
Currently, Palantir's stock value is staggering 65 times sales and 358 times earnings!
In contrast to the favored AI stock Nvidia (NVDA), which trades at 51 times earnings and 28 times sales, it's significantly more expensive despite Nvidia growing at a significantly faster pace.
Thus, what kind of growth would Palantir need to attain to reach Nvidia's present valuation? A significantly higher growth rate than it's currently demonstrating.
Let's suppose Palantir can achieve the following:
- 30% profit margin (boosted from its current 20%)
- 40% companywide revenue growth
If it accomplished that, it would take over four years for the stock price to reach the same valuation as Nvidia (disregarding stock-based compensation effects). This implies that the stock price would remain static for four years, while increasing and maintaining growth at its current levels.
These assumptions fail to align, especially considering the restricting factor of Palantir's product cost. As a result, I suggest investors explore alternative AI stocks for 2025, as there are considerably more enticing options available that don't harbor extravagant expectations.
In light of Palantir's high stock valuation, some investors might want to consider diversifying their investing portfolio by exploring other affordable AI stocks for 2025, as there are numerous promising options available that don't come with such lofty expectations.
Moreover, potential investors should carefully consider the cost-effectiveness of Palantir's services, as many companies may not be able to afford the exorbitant price tags associated with its offerings. This price barrier could limit Palantir's customer base, potentially impacting its growth prospects in the future.