Might Palantir Technologies stock (NASDAQ: PLTR) fall to ranges of $60 within the close to time period from the $120 plus ranges it’s at at the moment? Does this sound far-fetched?
Contemplate this – a mere three months in the past, PLTR inventory was buying and selling at round $60, roughly 50% under the present worth. And fewer than 6 months in the past (September 2024) the inventory was buying and selling at nearly $30 per share! Issues may reverse simply as rapidly. Palantir trades at a really wealthy valuation. On the present market value of $124 per share, Palantir inventory trades at roughly 300x trailing earnings and 220x projected FY’25 earnings. The inventory trades at a whopping 75x ahead gross sales.
Picture by Innova Labs from Pixabay
There are a number of causes for this together with the surging curiosity in generative AI, the re-election of Donald Trump to the U.S. Presidency, and likewise the sturdy earnings posted by the corporate in current quarters. That being stated, inventory markets are sometimes myopic and have a tendency to extrapolate short-term developments for the long term. In Palantir’s case, markets count on the AI frenzy to maintain going with Palantir persevering with to notch up share within the business facet of the enterprise, diversifying away from its core authorities enterprise. Nonetheless, there are appreciable dangers right here.
Palantir Inventory’s Volatility
The rise in PLTR inventory over the past 4-year interval has been removed from constant, with annual returns being significantly extra risky than the S&P 500. Returns for the inventory had been -23% in 2021, -65% in 2022, 167% in 2023, and 340% in 2024. The Trefis High Quality (HQ) Portfolio, with a group of 30 shares, is significantly much less risky. And it has comfortably outperformed the S&P 500 over the past 4-year interval. Why is that? As a bunch, HQ Portfolio shares offered higher returns with much less danger versus the benchmark index; much less of a roller-coaster trip as evident in HQ Portfolio performance metrics.
Palantir’s Income Progress Might Falter Due To A Couple Of Causes
Income development has been choosing up. Over the latest quarter, the corporate noticed its income surge by about 36% year-over-year to $828 million, whereas additionally significantly exceeding administration steerage of $767 million in income. Yr-over-year development charges picked up from 30% in Q3 and 20% in This fall 2023, indicating that the corporate’s AI instruments are gaining momentum. For FY’25, development is projected at 32% per consensus estimates, up 29% in 2024. Nonetheless, there are dangers that this development may cool off.
About 55% of the corporate’s income got here from authorities gross sales in 2024. The focus on authorities gross sales may show a difficulty as these contracts are sometimes unsure and lumpy, making them much less predictable. Whereas the markets have been optimistic a couple of Trump-led Republican administration – anticipating elevated federal spending on nationwide safety and immigration to spice up demand for Palantir’s software program – different components may pose challenges. Trump has been working to ease geopolitical tensions, together with mediating between Ukraine and Russia and addressing the Israel-Palestine battle. Whereas these efforts are a internet optimistic for international stability, they may dampen demand for Palantir’s software program and providers, which usually thrive throughout instances of geopolitical uncertainty.
Palantir’s long-term development is dependent upon the business market, which represents a much bigger alternative in comparison with the federal government sector. Palantir’s Foundry platform targeted on business prospects is utilized in industries together with manufacturing, retail, and healthcare. Whereas the business enterprise has seen traction – with U.S. business gross sales rising 64% in the latest quarter in comparison with 45% development in U.S. authorities gross sales – there might be headwinds. The corporate’s ticket sizes are sometimes giant and implementation can also be advanced and costly, that means that the product could not scale as effectively with small and medium-sized companies. This might affect development going ahead. Furthermore, Palantir faces competitors from giant and well-diversified tech firms resembling Microsoft who can cross-sell options to their current prospects.
Now Palantir’s revenues are on observe to develop 32% this 12 months to about $3.8 billion per consensus estimates. Nonetheless, if its development charges sluggish significantly from right here on to simply about 10% over the subsequent two years as a result of aforementioned components, gross sales may transfer from round $3.8 billion in FY’25 to simply about $4.6 billion in FY’27.
Palantir’s Margins Might Face Strain
Palantir’s margins have expanded significantly lately, as its income development outpaced working prices resembling gross sales and advertising and marketing bills. Adjusted internet margins stood at virtually 35% for 2024 – up from ranges of about 26% in 2023. That is in distinction to many different software program firms that sacrifice profitability in favor of development. Palantir has been capable of develop its marketing-related prices at a slower tempo, given the excessive ranges of customization of its product and buyer loyalty. Palantir’s engineers work carefully with prospects to raised perceive particular buyer issues and desires in order that they’ll configure the corporate’s software program accordingly. This loyalty is mirrored in Palantir’s internet retention fee of 118% over the past quarter. Nonetheless, this customization additionally limits the flexibility of the corporate to scale up its revenues quick sufficient to justify its excessive valuation. There stays a risk that the corporate may tweak its technique to handle a bigger buyer base and this might affect margins. Furthermore, the corporate’s margins may additionally face strain attributable to increased competitors within the business phase, the place well-entrenched enterprise software program gamers want to achieve a bigger share in AI instruments.
How does this affect Palantir’s valuation?
If we mix 1.2x income development (up 21%) between 2025 and 2027 with margins contracting from 36% ranges at the moment to about 32% (down 10%, or 0.9x), this is able to indicate that internet revenue development may sluggish to simply about 9% by 2027. Now if earnings development shrinks to ~9%, the P/E a number of is sure to take successful as traders reassess Palantir’s place as a development inventory. If Palantir’s P/E shrinks from a a number of of about 220x now to about 100x, this is able to translate right into a decline in Palantir inventory by about 50% to $62 per share.
The markets have rapidly compressed Palantir’s valuation multiples up to now as effectively. As an illustration, the inventory declined from about $29 per share in September 2021 to beneath $9 per share by Could 2022, buying and selling at a income a number of of nearly 10x, down from a peak a number of of over 35x in 2021.
Now what concerning the time horizon for this negative-return situation? In follow, it gained’t make a lot distinction whether or not it takes 2 years or much less – if the above threats play out, we may see a correction. And an enormous one at that.
| Returns | Feb 2025 MTD [1] |
Since begin of 2024 [1] |
2017-25 Whole [2] |
| PLTR Return | 44% | 594% | 406% |
| S&P 500 Return | 1% | 28% | 173% |
| Trefis Strengthened Worth Portfolio | -2% | 21% | 719% |
[1] Returns as of two/15/2025
[2] Cumulative complete returns for the reason that finish of 2016
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The views and opinions expressed herein are the views and opinions of the writer and don’t essentially mirror these of Nasdaq, Inc.
