Is Palantir Stock Set to Soar Again in the New Year?

Palantir (NASDAQ: PLTR) was one of the best-performing stocks of 2024. The analytics and software management platform for government agencies, the military, and big business soared 340% for the year and sports a market cap of $167 billion as of this writing.

Shareholders of Palantir no doubt appreciated the company's performance in 2024, but investors are likely looking at the new year and asking themselves: Can Palantir keep up this momentum? Time to dig into the fundamentals of this fast-growing company and find out.

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Price momentum and business acceleration

Incredible returns like those Palantir experienced in 2024 often come from accelerating growth. Excitement around the business has become real momentum for the stock as Palantir has accelerated its revenue growth for five straight quarters, thanks to the popularity of its artificial intelligence (AI) analytical tools.

Commercial revenue in the United States was up 54% year over year in Q3 2024, hitting a record high of $179 million for the segment. This fast-growing opportunity in the private sector has been a core driver of Palantir stock's recent gains.

That said, its public-sector business continues to expand as well with U.S. government revenue up 40% year over year last quarter to $320 million. This is still Palantir's largest segment as the company got its start serving the military, intelligence services, and other government agencies.

The company saw its weakest performance last quarter outside the U.S. with international government and commercial revenue up 13% and 3%, respectively. Palantir was able to accelerate its overall revenue growth despite challenges in Europe and the Middle East, and if this top-line trend holds in 2025, the stock is likely to keep rising. It's hard to bet against that kind of momentum, at least in the short term.

The valuation is less than desirable

With annual revenue of more than $2.5 billion, the increased scale has allowed Palantir to generate healthy profits. Last quarter, its GAAP (generally accepted accounting principles) net income margin was 20%, while its operating margin was 16%, and it's likely these margin figures will keep expanding over the next few years.

If the company sustains its 30% revenue growth rate, the company will clear $10 billion in annual revenue by 2029. Assuming its net margin also hits 30% during this period, you get about $3 billion in annual earnings for this AI and software giant.

As bullish as such an outlook may seem for Palantir, its share price already reflects investor expectations that are as optimistic as what I described above -- perhaps even more so.

With a market cap of $167 billion, the stock boasts a price-to-earnings ratio (P/E) of more than 60 based on its ability to eventually generate $3 billion in annual earnings. But that five-year forward multiple is still nearly triple the S&P 500's forward P/E ratio of 22, which is based on the next 12 months.

Looking at the valuation in another way, the stock has a trailing price-to-sales ratio (P/S) of 68. The pandemic rally was the last time investors drove up growth stocks to such astronomical valuations, and buying at those elevated prices proved to be a costly mistake for many investors. Palantir's P/S ratio is one of the highest in history, so the market's expectations for its growth are similarly high.

Data by YCharts.

Why next year doesn't matter

No one knows exactly what what Palantir stock will do in 2025. However, if the company keeps accelerating its revenue growth quarter after quarter, the stock could still add to its 2024 gains.

Regardless of what you think about Palantir's near-term momentum, though, those who focus on buying and holding quality stocks for the long haul need to pay attention to the price they pay for a stock and how much in earnings and cash flow the company will realistically generate for shareholders over the next five years and beyond.

Today, Palantir's market cap of $167 billion seems wildly out of line with what it can earn in the future, even in the most bullish of scenarios. For this reason, investors should avoid buying shares of Palantir stock in 2025.

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Brett Schafer 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.