Few companies have reacted more to Trump's presidential election victory than Palantir Technologies(NYSE: PLTR), a data analytics and artificial intelligence (AI) company with a strong focus on defense and law enforcement. The company has added billions to its market cap, with shares up by a jaw-dropping 50% since the election.
But is Palantir's recent rally based on hype and excitement or sustainable economic fundamentals? Let's dig deeper into what the next 12 months could have in store for this unique technology leader.
Pivoting quickly to AI
Founded in 2003, Palantir is arguably an early AI company. Its software-as-a-service platforms are designed to extract insights from large volumes of raw data to help organizations notice patterns, improve efficiency, and generate growth. The implementation of the large language model (LLM) technology behind algorithms like ChatGPT allows it to perform these tasks faster and deliver real-time insights.
This is a hugely competitive industry, with cloud computing giants like Microsoft, Snowflake, and Amazon offering similar services. However, Palantir seeks to differentiate itself with a focus on tailor-made solutions that can emphasize security.
The company offers its services through three core platforms: Gotham, Foundry, and the Artificial Intelligence Platform (AIP). Gotham helps government clients with decision-making, intelligence gathering, and military targeting. Foundry specializes in finding business efficiencies and trends for corporate clients, while Palantir's AIP helps all types of organizations create and deploy AI applications.
The Trump effect
If stock price trends are anything to go by, Trump's presidential election victory has boosted optimism for Palantir's stock. While stock moves don't always have a tangible rationale behind them, this trend may have something to do with Palantir's role in the previous Trump administration when it helped Immigration and Customs Enforcement (ICE) with tracking down and deporting undocumented immigrants.
The customized data analytics solution called Falcon (which Palantir created for ICE) uses data accumulated from government surveillance networks and public records to help agents plan future raids and operations. While the tools attracted a great deal of negative publicity from the media and activists, Palantir didn't back down -- allowing it to keep the contract and positioning it for future controversial deals.
Image source: Getty Images.
That said, the Falcon contract only generated $127 million between 2013 and 2022, which isn't a game-changing amount for Palantir. Furthermore, Business Insider reports that the company may lose the contract as ICE moves to other service providers. Investors should look at Palantir's overall financial position instead of focusing on this relatively minor and uncertain revenue stream.
Focus on the fundamentals
In the third quarter, Palantir's revenue grew 44% year over year to $499 million. And while government clients still make up 64% of sales, its commercial business is growing fast -- jumping 54% to $179 million in the period. It looks like corporate clients aren't turned off by Palantir's controversial government work. And it can also hold its own in highly competitive generative AI and data analytics opportunities.
That said, a great company is not always a great investment if its valuation is out of line with its fundamentals. And with a forward price-to-earnings (P/E) multiple of 143 at the time of this writing, Palantir's stock is too expensive, even considering its healthy growth rate.
For context, the S&P 500 has a forward estimate of around 25. And AI industry leader Nvidia has a forward P/E of just 36, despite boasting a significantly faster top-line growth rate of 122% in the third quarter. With this in mind, Palantir looks poised for a significant correction over the next 12 months. And potential investors should tread with caution.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Microsoft, Nvidia, Palantir Technologies, and Snowflake. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
