With shares up by 41% since Nov. 5, Palantir Technologies (NASDAQ: PLTR) straddles two massive stock market hype cycles: generative AI and the Trump presidency. Let’s explore how these potential opportunities could play out for the data analytics company in 2025 and beyond.
AI before it was cool
While AI surged into the mainstream with the launch of OpenAI’s ChatGPT in late 2022, Palantir has been working on a somewhat related technology, big data analytics, since its founding in 2003.
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This field involves processing vast amounts of information to uncover trends, patterns, and other actionable insights. It can help organizations detect fraud, optimize workflows, or detect potential threats.
Big data analytics can be considered a precursor to large language models (LLMs) like ChatGPT. And Palantir quickly added generative AI capabilities to its legacy platforms to help them work faster and deliver real-time insights.
These features are particularly useful for military and law enforcement clients, where Palantir’s software can help operators identify and get information about real-time threats during missions.
Palantir is already using AI to assist the Ukrainian armed forces with military targeting during its war with Russia. And in June, the company partnered with Israel to work on combat-related technology.
The Trump effect
Palantir’s high-stakes business model makes it easy to hype it. However, Donald Trump’s victory seems to have sent things into hyperdrive. Judging by the stock’s 41% rally since Nov. 5, many investors see the new administration as a potential growth catalyst.
In the third quarter, Palantir earned $320 million (around 44% of all sales) from U.S. government clients, including the Department of Defense and the Department of Homeland Security.
During the previous Trump administration, Palantir played an important role in immigration policy, assisting Immigration and Customs Enforcement (ICE) with deportations. The new administration plans to ramp up these efforts, with Trump himself promising the largest deportation in U.S. history.
That said, it remains unclear how much Trump’s agenda will actually benefit Palantir, which works with ICE through a software-as-a-service (SaaS) contract called Falcon. According to the news website Business Insider, the company only earned $127 million from the contract between 2013 and 2022, coming out to roughly $14 million per year. That’s a drop in the bucket for a company guiding for sales of around $2.8 billion this year.
Business Insider also reports that ICE is working on replacing Falcon with a custom-built tool called RAVEn, which will mine publicly available data, unlike Falcon, which works with data already in the agency’s possession.
And while previous Republican presidents have generally pursued a hawkish foreign policy, Trump signaled that he would like to see the conflicts in Ukraine and the Middle East wind down. Palantir investors probably shouldn’t bet on a surge in military spending in 2025.
Do Palantir’s fundamentals justify its price tag?
Third-quarter revenue grew 30% year over year to $726 million, while adjusted earnings before interest, taxes, depreciation, and amortization jumped 39% to $283.6 million (this figure adds back $142.4 million in stock-based compensation).
While these results are decent, they are not outstanding — and certainly not good enough to justify the stock’s forward price-to-earnings ratio of 158. For context, the S&P 500 has an average forward PE estimate of 24, while AI industry leader Nvidia trades for just 30 times expected earnings despite growing its top line by 94% in its most recent quarter.
Palantir’s valuation is out of touch with its fundamentals. And Trump’s presidency probably won’t juice the company’s growth potential as much as the market seems to believe. Investors should expect its shares to come back down to earth in 2025.
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Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.