Palantir Technologies Faces Uncertain Future Amid AI Hype Cycle
Palantir Technologies (NASDAQ: PLTR) has seen its shares rise 279% over the past year, driven by two significant trends: generative AI and the election of President Donald Trump. Unfortunately for investors, these narratives may be faltering.
Let’s explore what this could signal for the company’s stock performance in 2025 and beyond.
A Hype-Driven Rally
Since its IPO on the Nasdaq in 2020, Palantir has garnered significant attention. The firm specializes in big data analytics, providing software as a service to key clients, including the Central Intelligence Agency (CIA) and the Department of Defense.
Notably, Palantir played a crucial role in the U.S. government’s efforts to locate Osama bin Laden, placing it at the cutting edge of military technology.
Following the mainstream introduction of generative AI by OpenAI, Palantir quickly seized the opportunity. It merged large language models with its data analytics tools, promising enhanced efficiency and real-time insights in dynamic contexts such as battlefields.
Additionally, the shifting political landscape, particularly Trump’s victory in 2024, may have also uplifted Palantir’s stock price. Co-founder Peter Thiel’s contributions to Trump’s campaign and his ties to Vice President JD Vance have drawn attention.
However, while these political connections are intriguing, their potential to yield sustained shareholder value remains uncertain.
Potential Challenges from the New Administration
Current policies from the Trump administration may hinder Palantir’s growth. One relevant scenario is the war in Ukraine, where Palantir assists Ukrainian forces in identifying Russian troop positions. Trump’s stated desire to expedite an end to this conflict could shrink demand for Palantir’s services.
In the U.S., where approximately 67% of its revenue is generated, Palantir might face further hurdles. Under Defense Secretary Pete Hegseth, the Pentagon has committed to annual budget cuts of 8% over the next five years, amounting to $50 billion each year, potentially restricting Palantir’s contract opportunities.
Image source: Getty Images.
Operational Results Fall Short
While the prospects for Palantir are uncertain, its current operational metrics are also less than impressive. In the fourth quarter, revenue increased by 36% year over year to $827.5 million, significantly lagging behind other AI firms like Nvidia, which experienced a 78% sales growth in the same quarter.
Though some consider Palantir an AI company, this depiction may be overstated. While the firm has integrated generative AI tools into its offerings, its performance aligns more closely with data analytics competitors like Snowflake, which recorded a 28% growth per its latest earnings report. Snowflake also employs AI, indicating that Palantir is not alone in this niche.
The concerning factor for potential investors is the adjusted earnings before interest, taxes, depreciation, and amortization, recorded at $379.5 million. This figure includes a hefty $281.8 million in stock-based compensation. While stock-based compensation offers cash savings, the substantial outflow raises concerns about dilution of future earnings for investors.
An Overvalued Position
Currently, Palantir resembles a typical data analytics company without a distinct advantage to warrant its steep rise in value. While its focus on military and government clients provides some differentiation, this could become a drawback as the Trump administration seeks to demilitarize and decrease government expenditures.
With a forward price-to-earnings (P/E) ratio of 156, Palantir’s valuation appears disconnected from its existing challenges, leaving significant downside risk through 2025. Prospective investors interested in AI should look for more reasonably priced alternatives.
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Will Ebiefung has no positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia, Palantir Technologies, and Snowflake. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
