Will This Artificial Intelligence (AI) Stock Continue Its Meteoric Rise in 2025?

One of the prominent stocks driven by artificial intelligence (AI) is Palantir Technologies (NASDAQ: PLTR). From a low of around $6 per share at the height of the 2022 bear market, the SaaS stock's AI tools have driven a more than 12-fold gain in the stock in two years.

That may lead to questions of whether that can continue in 2025. Ultimately, one cannot predict what will happen to Palantir over the next year. Still, looking at the state of the business and its financials could offer insight into whether they should expect the bull run to continue, or whether they should sell the stock and lock in gains.

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The state of Palantir

The current catalyst for Palantir stock hinges on AI-driven productivity gains.

Indeed, investors should first understand Palantir's platforms have long depended on AI. Both Gotham and Foundry have applied this technology since well before investors had any understanding of it.

However, it reached a new level upon releasing its generative AI-driven Artificial Intelligence Platform (AIP) in 2023. Palantir introduced this technology to clients through AIP boot camps soon after, yielding massive productivity gains for its users.

On the Q3 2024 earnings call, Palantir highlighted how an equipment rental company increased its average revenue retention (ARR) 12-fold. The gains highlighted by the product led customers from a variety of industries to sign seven-figure deals with Palantir.

On the government side of the business, it reported its strongest sequential growth in 15 quarters. It credited TITAN, the Army's next-generation intelligence ground station, for much of this growth. The company also mentioned the benefits of its Maven Smart System, which took what was a 2,000-person targeting cell and matched its performance with just 20 people.

Palantir's financials

Nonetheless, the main question for investors is how that translates into financial gains for Palantir. One has to wonder whether the exuberance is overly positive. Indeed, quarterly revenue growth has improved to 30% year over year. In comparison, its revenue of $2 billion for the first nine months of 2024 grew by 26% yearly.

During that time, the company's operating expenses grew by only 9%. That allowed its net income attributable to stockholders in the first three quarters of the year to rise to $383 million, increasing 229% compared to the same period in 2023.

With an improved performance, Palantir raised revenue guidance for 2024 to just over $2.8 billion, up from the $2.75 billion range in the previous quarter. If that forecast holds, the revenue growth rate will hold at 26%.

Unfortunately for potential investors, these gains are likely baked into its stock price -- and then some. This is not just because the stock is up by the aforementioned 12-fold gain in two years, or the approximate 300% rise over the last 12 months.

Instead, this is more likely a valuation call. Its trailing P/E ratio is about 368, which may not be representative of the stock's value.

Nonetheless, with the trailing price-to-sales (P/S) ratio of 67 and a forward sales multiple of 60, the stock shows clear signs of overvaluation. That sales multiple prices Palantir stock for perfection, indicating it could sell off at the first sign of less-than-ideal growth rates.

Will Palantir's meteoric rise continue in 2025?

Given Palantir's rise over the last 12 years, investors should not expect the increases to continue in 2025.

Admittedly, anything is possible with a cutting-edge AI stock like Palantir, and investors often choose to ignore high valuations when they see growth potential.

Nonetheless, investors take a tremendous risk when paying 60 times forward sales, no matter the long-term growth prospects. Such levels can lead those who are otherwise Palantir stock bulls to fear a significant retrenchment and sell, making buying the stock a highly risky prospect right now.

Indeed, the productivity gains Palantir's software offers likely mean its growth story will not end here. However, with so much of its forecast growth already priced into the stock, investors should probably keep Palantir on a watch list rather than a buy list at this time.

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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.