With its shares up 279% over the last 12 months, Palantir Technologies (PLTR +3.03%) has benefited from two recent hype cycles: generative AI and the election of President Donald Trump. Unfortunately for investors, both of these investment theses seem to be on their last legs.
Let's dig deeper to see what that could mean for the company's shares in 2025 and beyond.
A hype-driven rally
Since its debut on the Nasdaq through an initial public offering (IPO) in 2020, Palantir has attracted a fair share of attention. The big-data analytics company has an exciting business model, offering software as a service to clients like the Central Intelligence Agency and Department of Defense.
The company even helped the U.S. government track down Osama bin Laden, putting it at the forefront of military tech.
When OpenAI introduced generative AI to the mainstream, management quickly pounced on the opportunity, synergizing large language models (LLMs) with its existing data analytics tools to make them more efficient and offer real-time insights in fast-paced scenarios such as battlefields.
The stock price also may have benefited from the changing political climate, which culminated in Trump's election victory in 2024. Palantir's co-founder, Peter Thiel, donated to Trump's campaign and has a close relationship with Vice President JD Vance, who used to work for Thiel's global investment fund, Mithril Capital.
But while these political relationships are interesting, it's hard to see how they will directly translate to sustainable shareholder value.
The new administration might not benefit Palantir
Many of the Trump administration's policies could put Palantir on the back foot. The best example might be the war in Ukraine, where the company helps the Ukrainian armed forces target Russian troops. The Trump administration has expressed a desire to end this war as soon as possible, which could reduce the market for Palantir's services.
Palantir could also face further challenges in the United States, where it earns the lion's share of its revenue (around 67%). Under Defense Secretary Pete Hegseth, the Pentagon has pledged to cut 8% of its budget annually for the next five years (a reduction of $50 billion per year). And this could limit the company's ability to earn contracts.
Image source: Getty Images.
Operational results are lackluster
The company's future business looks uncertain, but its current operations also leave much to be desired. Fourth-quarter revenue grew 36% year over year to $827.5 million, which is significantly lower than others in the AI industry like Nvidia, which grew sales 78% in its fiscal fourth quarter.
Many see Palantir as an AI company, but that narrative seems overblown. The company has incorporated generative AI tools into its software. However, operational performance is more in line with data analytics peers like Snowflake, which grew 28% according to its most recent earnings report. Snowflake has also incorporated AI into its business, which means Palantir isn't the only game in town regarding this niche.
The bottom line is where the alarm bells really start ringing. Adjusted earnings before interest, taxes, depreciation, and amortization are $379.5 million, but this adds back a stunning $281.8 million in stock-based compensation. Although stock-based compensation allows Palantir to save cash, this outflow looks excessive and could dilute investors' claims on future earnings.
An out-of-touch valuation
Palantir looks like just another data analytics company with no clear edge to justify its massive rally. Granted, its focus on military and government clients gives it some differentiation from the competition. But this might turn into a liability as the Trump administration pursues a policy of demilitarization and lower government spending.
With a forward price-to-earnings (P/E) multiple of 156, Palantir's valuation doesn't account for its many challenges, and this leaves room for a substantial downside in 2025. Investors who want to bet on AI should look for more reasonably priced options.
