Could Palantir Technologies stock (NASDAQ: PLTR) drop to $60 in the near future from its current price above $120? Does this seem unlikely?
Consider this—just three months ago, PLTR stock was around $60, nearly 50% lower than its current level. Less than six months ago (September 2024), the stock traded at approximately $30 per share. Just as quickly as it surged, it could decline. Palantir is trading at a high valuation. At its current market price of $124 per share, the stock is valued at about 300 times trailing earnings and 220 times projected FY’25 earnings. Additionally, it trades at a substantial 75 times forward sales.
Several factors have contributed to this increase, including the growing interest in generative AI, the re-election of Donald Trump as U.S. President, and the company’s strong earnings reports in recent quarters. However, stock markets often focus on short-term trends and extend them into the future. Investors anticipate that Palantir will continue gaining traction in the commercial sector, diversifying beyond its core government business. Yet, there are significant risks involved. Separately, after plenty of moves, see SMCI Stock To 2x?
Palantir Stock’s Volatility
Over the past four years, PLTR stock has exhibited significant volatility compared to the S&P 500. Annual returns were -23% in 2021, -65% in 2022, 167% in 2023, and 340% in 2024. The Trefis High Quality Portfolio, consisting of 30 stocks, has been considerably less volatile while consistently outperforming the S&P 500 over the same period. Why is that? These stocks have delivered better returns with lower risk than the benchmark index, avoiding the extreme fluctuations seen in PLTR stock, as evidenced by HQ Portfolio performance metrics.
Potential Challenges for Palantir’s Revenue Growth
Palantir’s revenue growth has accelerated. In the most recent quarter, revenue surged 36% year-over-year to $828 million, well above the management’s guidance of $767 million. Growth rates have increased from 30% in Q3 and 20% in Q4 2023, suggesting strong momentum for Palantir’s AI tools. Consensus estimates project 32% growth for FY’25, up from 29% in 2024. However, this growth may slow.
In 2024, government sales accounted for 55% of the company’s revenue. This reliance on government contracts presents risks, as these agreements are often unpredictable. Investors have been optimistic about a Trump-led Republican administration, expecting increased federal spending on national security and immigration to benefit Palantir. However, Trump has also been working to ease geopolitical tensions, including mediating between Ukraine and Russia and addressing the Israel-Palestine conflict. While such efforts support global stability, they could reduce demand for Palantir’s software, which tends to thrive in uncertain geopolitical environments.
Long-term growth depends on Palantir’s expansion into the commercial market, which offers a larger opportunity than the government sector. The company’s Foundry platform serves industries such as manufacturing, retail, and healthcare. U.S. commercial sales grew 64% in the latest quarter, outpacing the 45% growth in U.S. government sales. However, challenges remain. Palantir’s large contract sizes and complex implementations may limit its scalability among small and medium-sized businesses. Additionally, competition from major tech companies like Microsoft, which can leverage existing customer relationships, could pose a challenge.
While Palantir’s revenue is projected to grow 32% to $3.8 billion this year, a slowdown to 10% annual growth over the next two years could result in revenues reaching only $4.6 billion by FY’27.
Potential Margin Pressures
Palantir has improved its margins significantly as revenue growth has outpaced operating costs, such as sales and marketing expenses. Adjusted net margins rose to nearly 35% in 2024, up from 26% in 2023. Unlike many software companies prioritizing growth over profitability, Palantir has controlled its marketing expenses while maintaining customer loyalty through highly customized solutions. This is evident in the company’s 118% net retention rate last quarter. However, this customization also limits its ability to scale revenue rapidly enough to justify its high valuation. If Palantir adjusts its strategy to reach a broader customer base, it could impact margins. Additionally, increasing competition in the commercial sector may further pressure profitability.
How Could This Impact Palantir’s Valuation?
If revenue grows 21% between 2025 and 2027 (1.2x), but margins decline from 36% to 32% (0.9x), net income growth may slow to around 9% by 2027. If earnings growth drops to this level, the stock’s P/E multiple could decline as investors reevaluate Palantir’s growth potential. A contraction in P/E from 220x to 100x could result in a 50% decline in Palantir’s stock price to approximately $62 per share.
Historically, Palantir’s valuation multiples have compressed rapidly. For example, its stock dropped from $29 per share in September 2021 to under $9 per share by May 2022, as its revenue multiple shrank from over 35x to just 10x.
How soon could this happen? Whether it takes two years or less, if these risks materialize, a significant correction could be on the horizon.
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