Palantir Thrives Amid Tech Sell-Off, But Challenges Loom Ahead
This year has posed significant challenges for numerous tech stocks. Factors such as unpredictable tariffs from the Trump Administration, a complicated trade war with China, and high interest rates are driving investors toward more conservative choices. As a result, many high-growth tech stocks have seen a decline in their appeal.
Amid this backdrop, Palantir (NASDAQ: PLTR) stands out, having gained over 40% year-to-date, while the Nasdaq has dipped more than 10%. This article explores why Palantir has remained robust in a challenging market and whether it continues to be an attractive investment at present levels.
Understanding Palantir’s Business Model
Palantir, inspired by the all-seeing orbs from The Lord of the Rings, specializes in data mining and analytics. The company aggregates data from numerous sources, allowing clients to identify trends and make informed decisions.
It operates two main platforms: Gotham, aimed at government users, and Foundry, designed for commercial clients. Various U.S. government agencies and military sectors use Gotham for data collection and operational planning, while major corporations like Morgan Stanley and Airbus utilize Foundry. Additionally, Palantir enables clients to create AI-powered applications across its platforms.
Initially funded by the CIA’s venture capital, Palantir’s early growth stemmed from government contracts. Its technology played a role in various high-profile missions, including the search for Osama Bin Laden and efforts related to immigration enforcement. This strong governmental association helped the company build a commercial client base.
Palantir’s Stock Performance Explained
Palantir went public through a direct listing on September 30, 2020, forecasting a 30% annual revenue growth rate through 2025. The company surpassed these expectations, recording a 47% revenue increase in 2020 and 41% in 2021. Nonetheless, growth slowed to 24% in 2022 and 17% in 2023, primarily due to timing issues with government contracts and broader economic challenges for commercial clients.
In response to slowing growth, Palantir cut costs and reduced stock-based compensation, achieving profitability under generally accepted accounting principles (GAAP) in 2023. By 2024, its revenue grew by 29%, with GAAP earnings per share more than doubling. This growth was largely driven by a more stable U.S. commercial business and increasing demand for government services, particularly in response to geopolitical tensions.
Palantir’s expanding market capitalization and sustained profitability led to its inclusion in the S&P 500 in September last year, followed by its addition to the Nasdaq-100 in December. These milestones may draw further interest from long-term investors.
Potential Obstacles to Growth
While Palantir’s future appears promising, three key challenges could limit its stock performance. First, its current market valuation seems inflated. With a market cap of $253 billion, it trades at 67 times this year’s revenue and 354 times its GAAP earnings per share. This puts Palantir in a position more akin to a speculative stock than a grounded growth investment.
Second, much of its recent growth reliance is on its U.S. commercial business, which accounted for 24% of its revenue in 2024. Tariffs imposed by the Trump Administration could compel these large clients to cut their spending, potentially jeopardizing new contracts for Palantir. Finally, the government sector of Palantir’s business may face challenges as the Trump Administration considers reducing government spending. Although Palantir has secured new government contracts this year, Defense Secretary Pete Hegseth urged the Pentagon to decrease the defense budget by 8% annually over the next five years.
These factors could lead Palantir to miss its ambitious forecasts, similar to what occurred in 2022 and 2023, and the elevated valuations could correct sharply. Therefore, despite its ongoing business growth, a cautious approach to investing in Palantir may be prudent at this stage, awaiting a more advantageous entry point.
Investment Considerations for Palantir Technologies
Before investing in Palantir Technologies, potential investors should consider the outlook and market dynamics:
Recent analyses highlight alternatives; Palantir Technologies is not included among the top recommendations by various analyst portfolios. Investors may find more promising possibilities in other stocks identified as strong contenders for significant gains in the coming years.
Leo Sun holds no positions in the stocks mentioned. Analyses reported herein do not necessarily represent the views of Nasdaq, Inc.
The views expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.
