Being a successful investor requires just a few skills: knowing when to buy and knowing when to sell. Although it seems simple, you will get incredible returns if you are the best at both things. There is a popular artificial intelligence (AI) stock that was a buy at the start of the year and has now moved into the sell category. It is Palantir (NASDAQ:PLTR).
Palantir has seen incredible success in 2024, with the stock price more than quadrupling. However, the stock has become disconnected from the business and I think it is highly likely that it will fall back to earth in 2025. As a result, it is best for investors to take their profits and run.
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The unfortunate thing about Palantir's business and stock disconnect is that it is doing incredibly well and will likely maintain this status quo throughout 2025 and beyond.
Palantir's application-specific AI models assist their customers in decision-making and have been widely used in the commercial and government sectors. One of its newest products that has quickly become one of its most popular is its Artificial Intelligence Platform (AIP). AIP enables its customers to integrate AI applications into their workflows rather than using them as a secondary tool. This allows companies to control the data that is connected to these AI models rather than transferring it to a third-party AI platform, which could pose a problem when sensitive information processed by the government is used.
Since the start of the AI arms race, Palantir's AI products have seen an increase in demand, resulting in strong performance for the company.
In the third quarter, Palantir's revenue increased 30% year over year to $726 million. U.S. customers outspent their international counterparts, with U.S. commercial revenue increasing 54% year-over-year to $179 million and U.S. government revenue increasing 40% year-over-year to $320 million. Palantir is also solidly profitable, posting a profit margin of around 20% for the second quarter in a row.
With this information alone, it's clear why Palantir has attracted a lot of investment interest. It is growing rapidly in an area that investors are currently focusing on.
Palantir is doing incredibly well as a company and I predict strong results for 2025. The problem is that its stock has become disconnected from these fundamental results.
As mentioned earlier, Palantir's shares are up more than 300%, but its revenue growth is only a tenth of that. As a result, the stock has become highly valued, trading at an incredible valuation.
At 64.5 times salesPalantir eclipsed the highest level Nvidia traded over the last three years (45 times sales). Despite significantly lower profit margins and much slower growth, the company succeeded. When Nvidia reached this valuation, its revenue tripled in the following quarter. At Palantir's current growth rate (30%), it would take more than four years to triple its revenue.
None of Palantir's valuation makes sense, which is unfortunate because the company is doing very well.
Let's take a second to evaluate the absolute best-case scenario for Palantir. This would include these factors:
Revenue growth accelerates to 40%.
Profit margin increases from 20% to 30% to match software leader Adobe.
It trades at 50 times current earnings.
The effects of stock-based compensation are ignored (this is a terrible assumption, since Palantir's stock count rose 3.5% last year thanks to heavy stock-based compensation) .
If Palantir achieved these four targets, the stock price would need to remain at its current level for more than four years to reach the valuation of 50 times current earnings. All of these assumptions are extremely aggressive and unlikely to come true, further illustrating how expensive Palantir stock has become.
As a result, I think there is a very high probability that Palantir stock will collapse. A day in 2025. There is simply too much growth in the stock for its current growth levels, and investors will eventually decide to take profits en masse, resulting in cause difficulties for the stock even if the company is doing well.
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Keithen Drury holds positions at Adobe. The Motley Fool ranks and recommends Adobe, Nvidia and Palantir Technologies. The Mad Motley has a disclosure policy.
