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AI Battle Ahead: Why Palantir Stock Faces a Tough Road in 2025

Palantir Technologies (NYSE:PLTR) first-quarter results show that the company’s revenue and customer base are growing rapidly. Still, PLTR’s profits remain quite low considering the company’s high-flying stock. And the company continues to face multiple, strong, worrisome threats. Moreover, the Street appears to have lost its love for Palantir stock. In light of these points, I continue to urge investors to unload the company’s shares.

Strong Revenue Growth Paired With Continued, Relatively Low Profits

In the first quarter, the company’s revenue climbed 21% versus the same period a year earlier, while its customer count jumped an impressive 42% year-over-year (YOY). And the increase of both of those metrics also accelerated compared to Q4, when its top line and customer base rose by 19.6% YOY and 32% YOY, respectively.

On the other hand, Palantir’s sales from U.S. companies increased 40% YOY, down from the 70% YOY increase in that area in Q4. I’ll have more to say about that in a minute.

On the profit side, the company’s Q1 operating income (OI) came in at $81 million. That represents a large increase, in percentage terms, compared with the $4.1 million of OI that the firm generated in Q1 of 2023.

But it’s worth noting that the $81 million of OI equates to $324 million on an annualized basis. And since the market capitalization of Palantir stock is $46.5 billion, the name is changing hands at a huge, annualized OI-to-price ratio of 143.5 times.

Palantir Is Facing Multiple Tough Threats

Palantir’s claim to fame and biggest growth engine is the company’s software that helps firms and government agencies easily deploy and manage AI tools. But as I’ve pointed out in past columns, numerous companies, including IBM (NYSE:IBM), C3.ai (NYSE:AI), and Booz Allen Hamilton (NYSE:BAH) have developed similar software. And three powerhouses — Nvidia (NASDAQ:NVDA), ServiceNow (NYSE:NOW) and Accenture (NYSE:ACN) — are working together to help firms deploy AI systems.

So Palantir has a huge amount of competition with which to contend on the AI front. That increasing competition is probably one major factor that caused the YOY increase in its overall revenue from the U.S. private sector to fall to 40% last quarter from 70% in Q4 of 2023.

Another threat facing Palantir is cost-cutting by the U.S. federal government. Whether President Trump or President Biden wins a second term, Washington is going to have to get serious about cutting costs starting next year. That’s because interest on the federal debt alone now equals 40% of personal income taxes collected. And with interest rates high and debt rising, that situation will only become more catastrophic as the years go by.

Further, either Trump and Biden will be lame ducks who cannot run for another term. That makes this a good opportunity for the political parties to finally reduce federal spending. I expect Congress to reach a bipartisan agreement that will rely primarily on reducing Social Security and Medicare spending for future beneficiaries to cut the deficit. I think they will have to make some cuts in other areas to say groups besides future middle-class retirees are sacrificing. As a result, Congress could meaningfully cut federal agencies’ IT budgets. S uch a decision could significantly hurt Palantir, which gets a large chunk of its revenue from Washington.

The Street Is Becoming Less Enamored With Palantir Stock

Barron’s noted that, although the Street analysts were “generally positive” about Q1 results, most think that the valuation of Palantir stock is “demanding.” Also, two major banks — Citi and Japan’s Mizuho — kept “neutral” ratings on the shares, while investment bank William Blair maintained an “underperform” rating on the name.

In another indication that the Street is less thrilled with Palantir than it once was, the name sank 21% between May 6, the day that it reported its Q1 results, and the market close on May 13.

On the date of publication, Larry Ramer’s wife held a long position in NOW. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.  

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been SMCI, INTC, and MGM. You can reach him on Stocktwits at @larryramer.

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