Where Will Palantir Stock Be in 3 Years?

With its shares up 58% year to date, Palantir Technologies (NASDAQ: PLTR) embarrassed its naysayers -- it has been repeatedly testing new highs despite calls of overvaluation. But on some level, the excitement is understandable.

Palantir operates at the intersection of two of the market's biggest hype drivers right now: generative AI and President Donald Trump's election. But could these catalysts help the data analytics giant justify its valuation over the next three years and beyond?

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Why is Palantir so popular right now?

Since its initial public offering in 2020, Palantir enjoyed a bit of a cult following, and it isn't hard to see why many people find the data analytics business exciting. In its early days, it was partially backed by the CIA's investment arm, Q-Tel, and its software helped the U.S. track down Osama bin Laden in 2011. Recently, the company began offering its Artificial Intelligence Platform (AIP), designed to offer real-time insights to operators in high-stakes environments like battlefields. Similar technology is already being used by the armed forces of Ukraine and Israel in their respective conflicts.

With its combination of mystery and accessibility, Palantir developed a broad appeal as an investment: It's one of the top 10 most-held stocks in portfolios on the retail investor-friendly platform Robinhood. But retail investors can often prioritize hype over substance: Failing meme stock GameStop is right behind it on Robinhood's top 10 list. While Palantir isn't a meme stock, it is arguably beginning to blur the line.

The valuation is unbelievable

With a price-to-earnings (P/E) ratio of 480, Palantir trades at a huge premium. For context, the tech-heavy Nasdaq-100 has an average P/E of just 29. And the AI industry leader, Nvidia, trades for a P/E of 39, despite growing its profits by a whopping 80% in the fourth quarter.

Palantir's business is not growing fast enough to justify its premium. Revenue grew by a respectable 39% year over year to $883.9 million, driven by strength in its US commercial segment (up by 71%, where it sells data analytics tools for enterprise use.

However, analysts are worried about its international segment. Overseas sales fell by 5% year over year because of weakness in Europe, where businesses have been slow to adopt AI-related services compared to the U.S. and China. However, this has more to do with the continent's corporate culture, which is outside of Palantir's control. Palantir's non-cash outflows may be a bigger red flag.

Image source: Getty Images.

While the company reported an adjusted EBITDA of $397.3 million in Q1, that sum adds back a whopping $214.6 million in stock-based compensation and related taxes. While offering employees stock-based compensation can save cash and help incentivize workers by giving them a share of the business, it also causes equity dilution, reducing prior shareholders' claims on future earnings.

What do the next three years have in store?

Over the next three years, Palantir stands to benefit from Trump's presidency. He already rolled back some restrictions on AI to prioritize free market innovation. Meanwhile, he aims to increase the nation's military budget to a record $1 trillion, which could increase demand for Palantir's services -- especially as the armed forces further adopt next-generation technologies.

That said, even in the best-case scenario, it's hard to see Palantir justifying its current valuation. While the company's cult following means that the stock may not crash in the near term, long-term investors may want to look for less speculative ways to bet on the AI industry.

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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.