The software AI darling Palantir (PLTR) has seen its stock price rise by around 360% over the last twelve months, making it one of the most hyped stocks of the moment. Despite this dramatic increase, I believe there are still strong reasons for continued bullishness. These include Palantir’s position as the purest AI player in the software industry, impressive revenue and margin growth, and a solid trend of upward guidance revisions. As a result, I rate the stock as a Buy heading into 2025.
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In this article, I’ll outline three points that I believe could justify Palantir’s momentum continuing to be sustained throughout this year.
Palantir Is a Pure AI Play Driving a Revolution
The first point behind my bullishness for Palantir in 2025 is that the company, led by CEO Alex Karp, is possibly the purest AI player in the software industry. For example, Palantir’s products are divided between the government side of the business, Gotham, and the commercial arm, Foundry, as well as Palantir’s Artificial Intelligence Platform (AIP), which is used by enterprises. All of these products are built around AI-driven data analysis.
To be clear, Palantir’s strength lies in its commercial business and in its ability to handle and analyze very large, complex, and often unstructured data from a variety of sources. And arguably, there is no other software company that has managed to do this as well as Palantir at the moment. Take Salesforce’s (CRM) Einstein, for example. Even though it’s a powerful tool for automating tasks and predicting customer behavior, it’s more suited for sales, where it helps with customer interactions and lead scoring. While useful, it doesn’t address the wide variety of complex, high-stakes data problems that Palantir can manage.
With these enormous competitive advantages, Palantir’s commercial business has seen commercial revenue accelerate by 54% year-over-year and 13% quarter-over-quarter in Q3. So, at a time when AI has been the great disruptive technology of the last decade at least, these are concrete growth figures, which signal real demand rather than speculation over its potential.
Revenue and Margin Growing Simultaneously
The second point that helps to better understand the bullishness around Palantir is the company’s pristine execution of a clear winning strategy, where it enters businesses, secures deals, and streamlines expenses.
When we look at recent figures, revenues grew 30% in Q3 while adjusted operating margins increased to 38%, up from 37% last quarter. This is impressive, considering that the management team has managed to balance strong execution and cost control while driving revenue growth without negatively impacting profit margins—which is usually what happens to most companies during growth stages.
To better illustrate this scenario, it’s interesting to look at Palantir’s status within the Rule of 40. Basically, this rule consists of SaaS (Software as a Service) companies that may have low earnings today but still be a great investment if revenue growth and profit margin percentages together total 40 or more. During Q3, Palantir reported a Rule of 40 score of 68, clearly passing the benchmark with flying colors.
A Premium Valuation Doesn’t Mean the Stock Won’t Go Higher
The third and final point for the bullish thesis on Palantir lies in the thesis’ main point of skepticism: valuation. Looking at the current multiples, bears arguably have plenty of reasons to be skeptical. Palantir is trading at a forward P/E ratio of 199x. Even when adjusting for forecasted EPS growth of 27.5% over the next three to five years (which is still robust), it’s hard to argue that the stock isn’t overvalued, with its PEG ratio of 7.2x being more than 4.5x higher than Nvidia’s (NVDA).
So, what’s the counterargument? First, I agree with bears that from a “spreadsheet” perspective, the valuations are at a very high level of exaggeration. On the other hand, I believe many of the company’s bullish investors see Palantir as a potential “Big Tech” giant, perhaps reaching a trillion-dollar market cap in a few years. As the price of Palantir today reflects the company’s future growth expectations, it is extremely difficult to predict precisely how far the company can go. Even Palantir itself doesn’t really know.
When we look at Palantir’s performance each quarter, we see the company consistently adjusting its financial guidance as demand for its services evolves. Perhaps this uncertainty is why analysts’ projections seem highly speculative. However, in the long run, it is also why its sky-high valuation could ultimately be justified. Thus, I believe that as long as guidance keeps being revised upwards, the stock will likely go up, no matter what multiple the company is trading at. This suggests that current growth projections are only a conservative view of Palantir’s future within the AI software space.
Is PLTR A Buy, According to Wall Street Analysts?
Despite the remarkable performance over the last year, Wall Street’s consensus on Palantir appears to be more conservative. PLTR is rated as a Hold based on two Buys, eight Holds, and six Sells assigned in the past three months. Furthermore, the average price target is $44.85, implying a downside risk of -40.35%.
For investors who are skeptical about buying Palantir stock at these prices, while valuation may be a valid concern, there are concrete reasons why the market is valuing the company to this extent. However, I still see the stock as a Buy, considering that Palantir remains arguably the purest AI player in the software industry as it continues growing revenues and margins at extremely consistent levels.
Additionally, demand for its products has been so robust that guidance has been constantly revised upwards, which is likely to sustain the bullish momentum going forward.
