Palantir Stock Is Down 37% From Its Peak: Here's What Could Happen Next

At the time of writing, Palantir's (NASDAQ: PLTR) stock price is down 37% from an all-time high of roughly $125 reached on Feb. 18. This is an alarming turn of events for a Wall Street darling that has benefited from two big hype cycles: generative AI and the election of Donald Trump.

Let's dig deeper to find out if this dip is a buying opportunity or a signal to stay far away from an increasingly volatile tech stock.

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What has changed for Palantir?

Since hitting public markets through an initial public offering (IPO) in October 2020, Palantir has always enjoyed a bit of a cult following. For years, the CIA-funded start-up made a name for itself by helping government and military clients with big data analytics -- playing a crucial role in the War on Terror when the company helped the U.S. track down Osama Bin Laden in 2011.

But even at the start of its public trading, Palantir was more hype than substance. After the IPO boom, shares languished for around four years until the generative artificial intelligence (AI) hype cycle reignited interest in the company. The expectation is that generative AI will allow Palantir to improve its data analytics capabilities -- even offering real-time insights during fast-paced scenarios like battlefields or law enforcement operations.

The synergy is undeniable. Large language models (LLMs) need large amounts of data, which Palantir already handles for its clients. General AI will be yet another tool in its tool kit as it helps organizations optimize their operations, detect fraud, and accomplish critical missions.

A story of hype over fundamentals

While Palantir has clear synergies with generative AI, that isn't actually translating to booming growth. In full-year 2020 (two years before ChatGPT introduced the world to generative AI), Palantir's revenue grew by 47%. However, by the full year 2024, the growth rate fell to 29%, which indicates that the new tech isn't exactly a game changer.

For comparison, an AI winner like Nvidia saw its top-line growth increase from 53% to 114% over the same time frame.

Despite not being a major AI winner, Palantir's stock price climbed a whopping 722% over the last five years, slightly outpacing Nvidia's 704%. This dynamic shows how much hype is built into Palantir's valuation.

PLTR data by YCharts

Palantir's bottom-line situation is also disappointing. While the company reports adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $379.5 million, this adds back a whopping $281.8 in stock-based compensation, which is company equity given to employees. While this allows Palantir to save cash, it can increase the number of shares outstanding and dilute the holdings of existing shareholders.

Does Palantir have a Trump card?

Trump's election victory has been another source of hype for Palantir (shares rose more than 60% since Nov. 5.). But just like with AI, this presents few fundamental advantages for the company. Trump has been working to reduce U.S. federal spending. Under new Defense Secretary Pete Hegseth, the Pentagon plans to slash its budget by 8% (around $50 billion annually) every year for the next five years.

U.S. government clients made up around 42% of Palantir's revenue in 2024. With Uncle Sam set to tighten his belt over the coming years, Palantir could be in hot water.

Further challenges come from overseas government clients like the armed forces of Ukraine, which uses Palantir's software for targeting in its war with Russia. Trump is working to wind down this conflict, potentially cutting more of the company's vital revenue stream.

Image source: Getty Images.

Palantir stock is a screaming sell

With a forward price-to-earnings (P/E) multiple of 135, Palantir's stock price doesn't account for the company's many challenges. Top-line growth is decent but not spectacular, while extreme stock-based compensation expense eats into its bottom line. Meanwhile, the Trump administration is shaping up to be a challenge, not an opportunity.

Palantir shares have already fallen 37% from their all-time high, and unfortunately, even more downside looks inevitable.

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