Could Palantir Technologies stock (NASDAQ: PLTR) fall to levels of $60 in the near term from the $120 plus levels it is at currently? Does this sound far-fetched?
Consider this – a mere three months ago, PLTR stock was trading at around $60, roughly 50% below the current value. And less than 6 months ago (September 2024) the stock was trading at just about $30 per share! Things could reverse just as quickly. Palantir trades at a very rich valuation. At the current market price of $124 per share, Palantir stock trades at roughly 300x trailing earnings and 220x projected FY’25 earnings. The stock trades at a whopping 75x forward sales.
Image by Innova Labs from Pixabay
There are multiple reasons for this including the surging interest in generative AI, the re-election of Donald Trump to the U.S. Presidency, and also the strong earnings posted by the company in recent quarters. That being said, stock markets are often myopic and tend to extrapolate short-term trends for the long run. In Palantir’s case, markets expect the AI frenzy to keep going with Palantir continuing to notch up share in the commercial side of the business, diversifying away from its core government business. However, there are considerable risks here.
Palantir Stock’s Volatility
The increase in PLTR stock over the last 4-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were -23% in 2021, -65% in 2022, 167% in 2023, and 340% in 2024. The Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has comfortably outperformed the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.
Palantir’s Revenue Growth Could Falter Due To A Couple Of Reasons
Revenue growth has been picking up. Over the most recent quarter, the company saw its revenue surge by about 36% year-over-year to $828 million, while also considerably exceeding management guidance of $767 million in revenue. Year-over-year growth rates picked up from 30% in Q3 and 20% in Q4 2023, indicating that the company’s AI tools are gaining momentum. For FY’25, growth is projected at 32% per consensus estimates, up 29% in 2024. However, there are risks that this growth could cool off.
About 55% of the company’s revenue came from government sales in 2024. The concentration on government sales could prove an issue as these contracts are often uncertain and lumpy, making them less predictable. While the markets have been optimistic about a Trump-led Republican administration – anticipating increased federal spending on national security and immigration to boost demand for Palantir’s software – other factors could pose challenges. Trump has been working to ease geopolitical tensions, including mediating between Ukraine and Russia and addressing the Israel-Palestine conflict. While these efforts are a net positive for global stability, they could dampen demand for Palantir’s software and services, which typically thrive during times of geopolitical uncertainty.
Palantir’s long-term growth depends on the commercial market, which represents a bigger opportunity compared to the government sector. Palantir’s Foundry platform focused on commercial customers is used in industries including manufacturing, retail, and healthcare. While the commercial business has seen traction – with U.S. commercial sales rising 64% in the most recent quarter compared to 45% growth in U.S. government sales – there could be headwinds. The company’s ticket sizes are typically large and implementation is also complex and expensive, meaning that the product may not scale as well with small and medium-sized firms. This could impact growth going forward. Moreover, Palantir faces competition from large and well-diversified tech companies such as Microsoft who can cross-sell solutions to their existing customers.
Now Palantir’s revenues are on track to grow 32% this year to about $3.8 billion per consensus estimates. However, if its growth rates slow considerably from here on to just about 10% over the next two years due to the aforementioned factors, sales could move from around $3.8 billion in FY’25 to just about $4.6 billion in FY’27.
Palantir’s Margins Could Face Pressure
Palantir’s margins have expanded considerably in recent years, as its revenue growth outpaced operating costs such as sales and marketing expenses. Adjusted net margins stood at almost 35% for 2024 – up from levels of about 26% in 2023. This is in contrast to many other software companies that sacrifice profitability in favor of growth. Palantir has been able to grow its marketing-related costs at a slower pace, given the high levels of customization of its product and customer loyalty. Palantir’s engineers work closely with customers to better understand specific customer problems and needs so that they can configure the company’s software accordingly. This loyalty is reflected in Palantir’s net retention rate of 118% over the last quarter. However, this customization also limits the ability of the company to scale up its revenues fast enough to justify its high valuation. There remains a possibility that the company could tweak its strategy to address a larger customer base and this could impact margins. Moreover, the company’s margins could also face pressure due to higher competition in the commercial segment, where well-entrenched enterprise software players are looking to gain a larger share in AI tools.
How does this impact Palantir’s valuation?
If we combine 1.2x revenue growth (up 21%) between 2025 and 2027 with margins contracting from 36% levels currently to about 32% (down 10%, or 0.9x), this would imply that net income growth could slow to just about 9% by 2027. Now if earnings growth shrinks to ~9%, the P/E multiple is bound to take a hit as investors reassess Palantir’s position as a growth stock. If Palantir’s P/E shrinks from a multiple of about 220x now to about 100x, this would translate into a decline in Palantir stock by about 50% to $62 per share.
The markets have quickly compressed Palantir’s valuation multiples in the past as well. For instance, the stock declined from about $29 per share in September 2021 to under $9 per share by May 2022, trading at a revenue multiple of just about 10x, down from a peak multiple of over 35x in 2021.
Now what about the time horizon for this negative-return scenario? In practice, it won’t make much difference whether it takes 2 years or less – if the above threats play out, we could see a correction. And a big one at that.
| Returns | Feb 2025 MTD [1] |
Since start of 2024 [1] |
2017-25 Total [2] |
| PLTR Return | 44% | 594% | 406% |
| S&P 500 Return | 1% | 28% | 173% |
| Trefis Reinforced Value Portfolio | -2% | 21% | 719% |
[1] Returns as of 2/15/2025
[2] Cumulative total returns since the end of 2016
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
