Palantir's AI-Driven Growth Sparks Valuation Debate Amid Software Industry Shake-Up

Will Palantir Be the World's Most Valuable Software Company? | The Motley Fool

After its surge, the stock is now ahead of more established pure-play software companies such as Adobe, Shopify, and ServiceNow, closing Tuesday with a market cap of $236.5 billion. Right now, the only American software company with a higher market cap than Palantir is Salesforce (CRM -4.92%), the leading customer relationship management software company and pioneer in cloud software. Palantir and Salesforce are at different stages of their lifecycles. Salesforce's revenue growth has fallen to just single digits for the first time in its history. Palantir, on the other hand, just saw its revenue growth accelerate for the sixth quarter in a row. Both companies have recently introduced new AI products, and Palantir's artificial intelligence platform (AIP) is driving rapid adoption among its U.S. commercial and government businesses. The company, which started out as a defense tech firm and has since expanded to serve commercial businesses, seems to have little direct competition in AI. In its 10-K report, Palantir says, "We are fundamentally competing with the internal software development efforts of our potential customers," and added that its customers often come to it after trying to build their own data platforms. On the earnings call, Chief Technology Officer Shyam Sankar said, "Palantir's real competition is a lack of accountability in government." That strength helps explain why Palantir's revenue growth accelerated to 36% and its margins continue to expand. According to the company, its AIP has helped banks accelerate back-office processes from five days to less than three minutes. Salesforce, on the other hand, introduced Agentforce, its agentic AI platform. While the new program has yet to have an an impact on Salesforce's bottom line, the company is well positioned to leverage the potential in AI with Agentforce, which has more than 150,000 customers. Moreover, customer relationship management lends itself to an AI assistant. There's another key difference between Palantir and Salesforce. Even though Salesforce's market cap is now less than 50% higher than Palantir's, there are significant differences in the sizes of their underlying businesses. Salesforce's revenue is still more than 10 times Palantir's: That could be an ominous sign for Palantir investors. There's no hard ceiling on size in the software sector, and AI could drive demand for software even higher, but there are also growth limitations in any business. The preceding chart also shows that Palantir is still just a fraction of Salesforce's size, meaning that Palantir trades at an especially lofty premium, and it may need to grow into that valuation before it overtakes Salesforce. It's also a good reminder that the software industry is only so big, especially for a company like Palantir that has struggled to grow outside the United States. Palantir could overtake Salesforce for the most valuable software company, but investors shouldn't confuse valuation with the underlying size of the business. The revenue gap between the two companies shows that Palantir's business could still grow a lot without a gain in the stock if its valuation eventually mirrors that of Salesforce. Palantir is growing significantly faster than Salesforce and has a clear set of competitive advantages in AI, but its valuation will eventually matter. Unless the company can become something more than a software stock, its ceiling may be closer than investors seem to believe.

Can Palantir Become a Trillion-Dollar Company? | The Motley Fool

Shares of big data platform Palantir (PLTR -2.38%) stunned investors on Monday, blowing away analyst revenue and profit targets on its fourth-quarter earnings report. In response, Palantir's stock rallied another 24% on Tuesday, surpassing $100 per share and reaching a market cap around $236.5 billion. The stock is now up over 500% over the past year, cementing its standing as one of the biggest winners of the AI revolution. The stock also looks wildly expensive at this moment. Still, Palantir's stock has always looked expensive, yet that hasn't stopped it from defying skeptics again and again. Could the stock quadruple again to reach a $1 trillion valuation, putting it in league with the Magnificent Seven? Here's the case to be made. Palantir no doubt delivered some impressive results in the fourth quarter and throughout 2024. In Q4, overall revenue grew 36%, with U.S. revenue up 52%, including U.S. commercial growth of 64% and U.S. government growth of 45%. The company also closed a record-high new quarterly contract value, at $803 million. While GAAP operating income came in at just $11 million or 1%, that was heavily affected by "one-time" stock appreciation rights, or SAR, for employees. On an adjusted non-GAAP basis, operating earnings were $373 million, good for a 45% operating margin. For the full year, Palantir grew 29%, with an adjusted operating income margin of 39%. Those results marked a big acceleration. Last year's fourth quarter saw only 20% growth, with full-year 2023 revenue growth of 17% and a 28% adjusted operating margin. While accelerating revenue and profitability is awesome, investors may get nosebleeds when looking at Palantir's valuation. Shares currently go for 505 times 2024 GAAP earnings. And even when using "adjusted" net income of $1 billion, which adds back stock-based comp that is a real expense to shareholders, shares still go for about 236 times earnings. When one looks ahead to 2025 guidance, Palantir still trades at 63 times 2025 sales guidance, even after 31% projected revenue growth, and 148 times adjusted free cash flow. Notably, management didn't guide for a GAAP net income figure, which would have been much lower than free cash flow due to high stock-based comp. While Palantir's valuation is currently at nosebleed levels, there is a case to be made for the stock, believe it or not. That case rests on Palantir's becoming a near-monopolistic platform for the enterprise in the age of artificial intelligence. Wedbush sell-side analyst Dan Ives is a bull, claiming Palantir's dominance of this new area could be akin to Oracle's dominance in enterprise databases or Salesforce's dominance of customer relationship management platforms. While Palantir isn't a builder of large language models, its software platform, which has been many years in the making, allows large language models (LLMs) to be harnessed in a useful and secure way for enterprises today. That appears to be a rare capability. Palantir unveiled its AIP platform in the second quarter of 2023, which brings LLMs into Palantir's core platforms. Since the introduction of AIP, growth has reaccelerated: Palantir's platform isn't traditional enterprise software. Rather, it composes what management calls an enterprise "ontology." As Palantir defines it, an ontology is essentially a "digital twin" of an enterprise's architecture, which all elements within an organization are reduced to a digital object with known properties, specified links between them, and which undergo certain defined actions. Thus, if one wants to "automate" one's enterprise through the use of AI, that AI will have to interface digitally with every database, factory, HR profile, and other objects in the enterprise's universe. And it also has to do so in a secure and compliant way. Palantir executive Shyam Sankar said on the conference call with analysts said if you only wanted to automate a single business, you wouldn't need an ontology platform. Moreover, if one were to build traditional software for all kinds of businesses, it wouldn't work in this AI context, as businesses aren't one-size-fits-all. However, Palantir's ontology framework, some 20 years in the making, enables a sort of mass-customization across players in various industries that makes enterprises easier to "automate" with AI. And because Palantir began with the Department of Defense for anti-terror activities, businesses also trust Palantir to manage a company's data in a highly secure way. Sankar elaborated: If you have the ambition to build software that works across government, across 50 different industries, you have to build Ontology. It is absolutely the longest path between Point A and Point B. But it gives you superpowers when you show up to your customers. It still remains to be seen if Palantir will become a monopolistic de facto platform for enterprise AI, but its accelerating revenue growth, even with a minimal sales force, certainly paints an optimistic picture. Whether one is talking about, say, an Oracle database, a Salesforce CRM platform, or a Microsoft Office suite, once a software platform achieves dominant status, it tends to get beneficial network effects. This happens because once a platform gets a big lead and becomes standardized, everyone tends to learn how to operate that platform, ingraining it even further. You don't want to have to learn three, four, or five different enterprise software platforms in school or at any one business, after all. That's why enterprise software platforms tend to be wide-moat, cash-generative businesses, and it's the reason Palantir may eventually reach $1 trillion over time -- even though it looks very far away from achieving that milestone today.

Is Palantir Technologies Wall Street's Biggest Bubble Stock of 2025? History Offers a Clear Answer. | The Motley Fool

For over two years, the bulls have been in complete control on Wall Street, with the ageless Dow Jones Industrial Average, widely followed S&P 500, and growth-dependent Nasdaq Composite all climbing to record-closing highs. While catalysts have been aplenty, nothing has provided more of a lift to the stock market than the artificial intelligence (AI) revolution. Empowering software and systems with AI, and giving them the capacity to reason, act, and evolve over time without the need for human intervention, is a game-changing leap forward for corporate America. It's precisely why the analysts at PwC foresee this technology adding $15.7 trillion to global gross domestic product by the turn of the decade. But when game-changing technologies arise, so does the potential for investors to grossly overvalue early stage adoption and utility. Last year, I intimated on more than one occasion that semiconductor colossus Nvidia (NVDA 5.21%) might represent the biggest bubble stock on Wall Street. Shares of Nvidia recently retraced by more than 20% from its all-time high as concerns about DeepSeek have called into question the level of hardware needed to optimize the training of large language models. While Nvidia stock is still pricey in many respects, it may have ceded the title of "Wall Street's biggest bubble stock" to AI-driven data-mining specialist Palantir Technologies (PLTR -2.38%), based on what history tells us. Palantir is a tale of two businesses: Gotham and Foundry. The former is an AI-driven platform that helps federal governments collect data and assists military organizations with mission planning and execution. Meanwhile, the latter is an AI- and machine learning-fueled platform designed to help businesses better understand their data, with the goal of streamlining their operations. For more than a decade, Gotham has been doing the heavy lifting for Palantir. The company is typically securing contracts that span four or five years and generate predictable cash flow from a government entity (i.e., there's no concern about not being paid). This is the segment that helped lift Palantir to recurring profitability well ahead of Wall Street's consensus forecast. Gotham is in a particularly ideal position given President Donald Trump's desire to protect America's AI interests and secure its intellectual property. In other words, the Trump administration's reshaping of the AI arena will more than likely result in a number of new contracts for Gotham. In comparison, Foundry is growing like a weed, but is still in its very early stages of expansion. As of the end of 2024, Foundry's commercial customer count clocked in at 571, which represents a 52% increase from the prior-year period. While other businesses might offer bits and pieces of the software-as-a-service (SaaS) solutions Palantir can provide, no other company comes close to providing these services at scale. This irreplaceability is what ensures Palantir's rock-solid operating cash flow and has earned the company quite the valuation premium. Following the close of trading on Monday, Feb. 3, Palantir did what it does best: blow the doors of Wall Street's expectations. Fourth-quarter sales of $827.5 million (representing 36% year-over-year growth) handily surpassed the consensus estimate of $781.2 million. What's more, Palantir's 2025 full-year sales guide of $3.741 billion to $3.757 billion cruised past Wall Street's $3.53 billion forecast. As of this writing in the late-evening hours of Feb. 3, shares of Palantir were trading hands at $102.79, which places its market cap in the neighborhood of $237 billion. There's no denying that Palantir has been the hottest AI stock on the planet over the trailing-two-year period. The all-important question is: Can its stock maintain a parabolic move higher? Based on what history tells us, the clear answer is no, in two respects. The first headwind Palantir is to encounter, per history, is a potential bubble-bursting event for AI stocks, as a whole. Every next-big-thing innovation and technology since (and including) the advent of the internet in the mid-1990s has navigated its way through a bubble-bursting event. Mind you, this isn't to say that AI and Palantir won't be wildly successful over the long run. Rather, it's to denote that investors consistently overestimate the early adoption and utility of potentially game-changing technologies. If an AI bubble does form and bursts, companies with premium valuations that are on the cutting-edge of a next-big-thing trend tend to be hit the hardest. In Palantir's defense, the multiyear contracts it receives provide exceptional cash-flow transparency that may be able to buoy its shares better than direct AI players like Nvidia. Nevertheless, the early boom-bust cycle for next-big-thing innovations would be expected to weigh on Palantir's stock. The other history-based concern for Palantir Technologies is the company's valuation, specifically pertaining to its price-to-sales (P/S) ratio. Looking back to the dot-com bubble a quarter century ago, leaders like Amazon and Cisco Systems peaked in the vicinity of a trailing-12-month (TTM) P/S ratio of 40. Interestingly enough, Nvidia may have also topped out at a P/S ratio of around 42 last summer. Based on Palantir's TTM sales of $2.866 billion and its market cap in after-hour trading on Feb. 3, it's commanding an almost unheard-of P/S ratio of 83! In my more than 26 years of investing, I can't recall a higher P/S ratio from a market-leading business being sustained. There are other worries, too, which extend beyond historic precedent. For example, a whopping 40% ($196.8 million) of Palantir's pre-tax income in 2024 derived from interest income on its growing cash pile. To be clear, I'm not faulting or penalizing Palantir for generating interest income on its cash with short-term Treasury yields above historic norms. Rather, I'm pointing to the company's valuation premium making even less sense when a substantial portion of its pre-tax profits are originating from an unsustainable and non-innovative source. What's more, Palantir's stock-based compensation (SBC) has been climbing at a frighteningly fast pace and is outpacing net income. SBC totaled $691.6 million in 2024, up from $475.9 million in the previous year. Ongoing SBC has the potential to dilute existing shareholders and weigh on earnings per share. While Palantir's operating model absolutely deserves some degree of premium valuation for its uniqueness and its consistent outpacing of analyst estimates, history is quite clear that all new innovations need to time mature (no exceptions!), and a P/S ratio of 83 isn't sustainable.

Will Palantir Stock Crash in 2025? | The Motley Fool

With shares up more than 333% over the last 12 months, Palantir Technologies (PLTR 1.83%) has been a massive beneficiary of generative artificial intelligence (AI), which many believe could revolutionize how people use and interact with big data. But could the AI boom become the AI doom? Let's discuss how issues like competition and overvaluation could stop Palantir's rocket ship rally in 2025 and beyond. Palantir specializes in big data analytics, which involves sifting through large volumes of information to uncover valuable insights. Founded in 2003, it is an early AI company because big data analytics is a precursor to the generative AI behind large language models (LLMs) such as ChatGPT, which exploded onto the scene in late 2022. Palantir quickly recognized the value of generative AI and implemented it into its existing software-as-a-service (SaaS) offerings. A great example of this is with the military, where management claims that its new Artificial Intelligence Platform (AIP) can help operators in the field identify and target enemy equipment in real time. Government clients are quickly adopting the new technology for their missions. In May, the company was awarded a $480 million deal to help the Department of Defense develop its Maven Smart System, an AI platform that integrates various data sources to improve battlefield awareness and decision-making. It has also won contracts with the governments of Israel and Ukraine for the use of its military-related software services in their respective wars. Palantir's third-quarter earnings reveal healthy (but not spectacular) operational expansion. Total revenue grew 30% year over year to $726 million as it closed 104 large deals (those worth more than $1 million). And the company reported adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $283.6 million. But this figure adds back $142.4 million in stock-based compensation. That kind of compensation can be a double-edged sword. While it helps young companies maintain cash reserves and motivate employees by giving them a stake in the company's success, it dilutes shareholders' ownership claim on the business. Palantir is currently spending around half of its adjusted EBITDA and 99% of its net income attributable to common stockholders on stock-based compensation, which doesn't look like an attractive situation for long-term investors. Furthermore, there is also no guarantee that the company can maintain or improve its current growth rate. Despite enjoying significant hype, the company doesn't seem to have any secret sauce that rivals can't replicate. When it comes to big data analytics, Microsoft offers a similar SaaS platform called Fabric. And it likely has access to more-advanced LLM models because of its close partnership with industry leader OpenAI. Over time, competition from other data analytics providers could become a serious threat to Palantir's growth and profit potential. Palantir's current valuation doesn't seem to price in its potential challenges. With a forward price-to-earnings multiple (P/E) of 164, shares are valued at more than 5.6 times the S&P 500 average of 29. And the stock is significantly pricier than faster-growing AI-related companies like Nvidia, which recently traded for just 33 times forward earnings despite seeing its revenue grow 94% in its most recently reported quarter. Financial markets can be illogical and speculative, so it is impossible to know how long Palantir will continue trading at such elevated levels. That said, the company's valuation doesn't seem to have a fundamental basis, making shares look likely to underperform in 2025 and beyond.

Could Palantir Stock Help You Retire a Millionaire? | The Motley Fool

Palantir Technologies (PLTR 1.83%) stock was one of the top performers on the stock market in 2024, jumping 340% in 2024. The defense tech stock was fueled by a ramp in revenue growth and operating margin, as its artificial intelligence platform (AIP) gained traction with both federal government customers and its U.S. commercial business. The company got its start in counterterrorism serving the federal government after 9/11, and it's since added new platforms, including AIP in 2023, which supercharged its business. Meanwhile, the AI boom also led investors to bid up the stock. Toward the end of last year, the stock jumped following a strong third-quarter earnings report and on the election, as investors anticipated more spending by defense contractors like Palantir. Palantir enters 2025 with a lot of momentum in the business, as revenue growth has accelerated for five quarters in a row and operating margin has improved for eight consecutive quarters. Driven by AI demand and improving utility in the commercial sector, Palantir scaled up its business, and margins have expanded significantly, delivering on the promise of its subscription business model. Along the way, it's attracted a lot of attention among investors, but can Palantir help you retire a millionaire? Let's take a look at the reasons to bet on the stock long term, as well as why you may want to look elsewhere. Because of its unique history in counterterrorism and defense tech, Palantir has significant competitive advantages in its niche of data mining, and the company says that it generally competes with in-house solutions from its potential customers. As it said in its annual report, "Organizations frequently attempt to build their own data platforms before turning to buy ours." Additionally, the company's AI platform significantly ramped up business with commercial customers, and it accelerated its sales cycles, going from product trial to a multimillion-dollar contract in less than two months. U.S. commercial revenue rose 54% in the third quarter to $179 million, emerging as a key growth driver for the company. The U.S. commercial market is much larger than the federal government, so its growth in that segment is a bullish indicator for its future. Palantir also continues to introduce new products, including a visual navigation AI that can guide autonomous drones in areas without GPS. As a business, Palantir looks solid. It has an impressive set of competitive advantages, given its focus on defense tech and experience in data mining and analytics. However, the company's growth rate may not be enough to justify the stock's lofty valuation. In fact, Palantir is now one of the most expensive stocks on the market based on its price-to-sales ratio of 72, which bakes in extraordinarily high expectations. While software stocks tend to trade at high valuations, even fast-growing ones tend to trade at a price-to-sales ratio of 20 or less, meaning Palantir trades at a significant premium compared even to its high-growth peers. Given that most of its business comes from the government, it may be hard for Palantir to significantly accelerate its growth rate past the 30% it reported in the third quarter. Despite being connected to AI, it doesn't have the same potential to go parabolic that a stock like Nvidia does. Palantir still has a lot of growth potential over the long term, but at the current valuation, investors are better off taking a wait-and-see approach with the stock. The valuation is likely to come down, either by the stock price falling or the business growing into the multiple, and at that point, the risk/reward will be more favorable for Palantir. After the stock more than quadrupled in one year, it shouldn't be a surprise that it's due for a breather.