Being a successful investor requires just a few skills: knowing when to buy and knowing when to sell. Although it sounds simple, you'll have incredible returns if you're the best at both. There's one popular artificial intelligence (AI) stock that was a buy at the beginning of the year that has now moved into the sell category. That's Palantir (PLTR +0.10%).
Palantir has been an incredible success in 2024, with the stock price more than quadrupling. However, the stock has become disconnected from the business, and I think there's a high likelihood that it could come falling back down to earth in 2025. As a result, it's best that investors take their profits and run.
Palantir's business is capitalizing on the AI arms race
The unfortunate thing about Palantir's business and stock becoming disconnected is that it is doing incredibly well and will likely maintain that status quo throughout 2025 and beyond.
Palantir's application-specific AI models aid their clients in decision-making and have found heavy usage in the commercial and government sectors. One of its newer products that has quickly emerged as one of its most popular is its Artificial Intelligence Platform (AIP). AIP allows its clients to build AI applications into their workflows rather than using it as a tool on the side. This allows businesses to control the data that gets plugged into these AI models rather than having it go to a third-party AI platform, which could present an issue when sensitive information that the government deals with is used.
NASDAQ: PLTR
Key Data Points
Since the AI arms race kicked off, Palantir's AI products have seen a surge in demand, which has translated into strong performance for the company.
In Q3, Palantir's revenue rose 30% year over year to $726 million. U.S. clients spent more than their international counterparts, with U.S. commercial revenue rising 54% year over year to $179 million and U.S. government revenue rising 40% year over year to $320 million. Palantir is also solidly profitable, posting a profit margin of around 20% for the second straight quarter.
PLTR Profit Margin (Quarterly) data by YCharts
With just this information, it's understandable why Palantir has received a lot of investment interest. It's growing rapidly in an area that investors are focused on right now.
Palantir is doing incredibly well as a business, and I predict strong results for 2025. The problem is that its stock has disconnected from these fundamental results.
The stock and the business are disconnected
As mentioned earlier, Palantir's stock is up by over 300%, yet its revenue growth is a tenth of that. As a result, the stock has become highly valued, trading at an unbelievable valuation.
PLTR PS Ratio data by YCharts
At 64.5 times sales, Palantir has eclipsed the highest level Nvidia traded at over the past three years (45 times sales). Despite significantly lower profit margins and far slower growth, it has done this. When Nvidia achieved that valuation, it tripled its revenue the following quarter. At Palantir's current growth rate (30%), it would take over four years to triple its revenue.
No part of Palantir's valuation makes sense, which is unfortunate because the company is doing so well.
Let's take a second to assess the absolute best-case scenario for Palantir. It would include these factors:
- Revenue growth accelerates to 40%.
- Profit margin rises from 20% to 30% to match software leader Adobe.
- It trades for 50 times trailing earnings.
- Effects of stock-based compensation are ignored (this is a terrible assumption, as Palantir's share count rose 3.5% this past year thanks to hefty stock-based compensation).
If Palantir achieved these four items, the stock price would have to stay at its current level for over four years to achieve the 50 times trailing earnings valuation. All of these are extremely aggressive assumptions that likely won't come true, further illustrating how expensive Palantir's stock has become.
As a result, I think there's a very high likelihood that Palantir's stock will crash sometime in 2025. There is just too much growth baked into the stock for its current growth levels, and investors will eventually decide to take profits en masse, which will cause the stock to struggle even if the business is doing well.
