Is Palantir Stock a Buy Before 2025?

Since November 5, shares of Palantir Technologies (NASDAQ: PLTR) have risen notably, marked by a 41% increase. The company operates at the intersection of two significant market trends: generative AI and political developments surrounding the Trump presidency. In this article, we will analyze how these dynamics may affect Palantir's future up until 2025 and beyond.

AI: A Journey Ahead of Its Time

Artificial Intelligence (AI) captured public attention with the debut of OpenAI's ChatGPT in late 2022. However, Palantir has been investing in big data analytics since its inception in 2003. This specialization involves processing massive amounts of data to identify trends, patterns, and insights that organizations can act on.

Big data analytics can be seen as a foundational technology that led to the development of large language models (LLMs), such as ChatGPT. In response to the rising interest in AI, Palantir quickly incorporated generative AI features into its existing platforms. This allows their software to deliver faster and more efficient real-time insights.

Such capabilities are especially beneficial for military and law enforcement agencies. For example, Palantir's applications can support operators by providing critical information on real-time threats during missions. The company has already been involved in assisting the Ukrainian military with targeting during the ongoing conflict with Russia. Additionally, a partnership with Israel has been established to develop military-related technologies.

The Impact of Trump Politics

Palantir's unique business model has naturally gained attention, but the return of Donald Trump to the political forefront has undoubtedly accelerated this excitement. The 41% jump in the stock price since November 5 suggests that many investors view this political shift as a potential growth opportunity for the company.

In the third quarter, Palantir reported $320 million in revenue from U.S. government clients, accounting for approximately 44% of its total sales. This includes key departments such as the Department of Defense and the Department of Homeland Security.

During Trump's previous term, Palantir played a significant role in immigration policy by assisting Immigration and Customs Enforcement (ICE) with deportations. With Trump's return to the political scene, he has pledged to enact the largest deportation policy in U.S. history, which many believe could benefit Palantir.

However, the extent to which the Trump administration's agenda will truly impact Palantir is uncertain. The company has a software-as-a-service (SaaS) contract known as Falcon with ICE, which generated only $127 million from 2013 to 2022—an average of about $14 million annually. This amount appears insignificant compared to Palantir's anticipated $2.8 billion in total sales for the current year.

Moreover, there are reports that ICE is considering replacing Falcon with a custom tool called RAVEn, which aims to utilize publicly available data—diminishing the financial benefit for Palantir.

While previous Republican administrations have typically favored aggressive foreign policies, Trump's stance suggests a preference for reducing involvement in overseas conflicts. This implies that Palantir investors should not bank on a substantial uptick in military spending come 2025.

Do the Fundamentals Support the Current Valuation?

In its third-quarter report, Palantir’s revenue rose by 30% compared to the same period a year earlier, reaching $726 million. Additionally, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) saw a notable increase of 39%, totaling $283.6 million. This figure includes $142.4 million already added back from stock-based compensation.

While these growth figures are commendable, they do not justify the company's current high valuations. Palantir has a forward price-to-earnings ratio of 158. In contrast, the S&P 500 exhibits a much lower average forward PE estimate of 24, and industry leader Nvidia trades at just 30 times its projected earnings while posting a staggering revenue growth rate of 94% in its latest quarter.

With such disparities, Palantir's stock appears misaligned with its fundamental performance. Furthermore, the expected favorable outcomes from Trump's administration may not propel Palantir’s growth as positively as many investors hope. It is reasonable to anticipate that the company’s stock may ease back to more realistic valuations by 2025.

Disclaimer: The author has no positions in any of the stocks mentioned. The author acknowledges that both Nvidia and Palantir Technologies are held within their portfolio.

AI, Stock, Trump