Palantir Technologies (NASDAQ: PLTR) has witnessed a tremendous increase in its market value in 2024 thanks to a remarkable surge of 313% in the company's stock price so far this year.
The company has a market cap of $162 billion as of this writing, up from around $35 billion at the beginning of the year. However, a closer look at Palantir's valuation indicates that it may have run ahead of itself. The software platform specialist has a price-to-sales ratio of a whopping 63, while its trailing earnings multiple stands at 345.
Not surprisingly, Wall Street isn't expecting much upside from the stock over the next year. The 20 analysts covering Palantir have a 12-month median price target of $38, which would be a 46% drop from current levels. If that does indeed happen, its valuation could drop big time in the coming year.
Of course, the company may be able to justify its expensive valuation thanks to the rapidly growing demand for artificial intelligence (AI) software platforms, a market where it is the leading player. But if cracks emerge in Palantir's growth story, especially as stiff competition grows from bigger and smaller players in the enterprise AI software space, there is a good chance investors will start booking profits -- leading the stock to fall.
This could pave the way for Arm Holdings (NASDAQ: ARM) and Applied Materials (NASDAQ: AMAT) to overtake Palantir's valuation in the next year. Let's see why these two companies may be worth more than Palantir in 2025.
1. Arm Holdings
With a market cap of just under $148 billion, Arm Holdings isn't very far from Palantir's valuation. And Arm stock has delivered impressive returns of 87% in 2024 due to the important role the company plays in the global semiconductor market.
Arm licenses its architecture and intellectual property (IP) to semiconductor companies and consumer electronics manufacturers so that they can develop different types of chips such as central processing units (CPUs), graphics processing units (GPUs), and microprocessors, among other things. The company's chip architecture is used across multiple industries including smartphones, data centers, computers, and automaking.
Arm enjoys a healthy market share in many verticals. For instance, in mobile applications, it has a market share of more than 99%. Its share of the consumer electronics chip market stands at 30%. Even better, it is gaining ground in fast-growing niches such as cloud computing and networking equipment, where it now commands 15% and 28% market shares, respectively, as compared to 9% and 23% a couple of years ago.
And its share of the automotive chip market has increased to 47% from 43% in a couple of years. In all, Arm estimates that its architecture and IP control 47% of the global chip market's $214 billion value. The company expects to benefit from the growing complexity of chips deployed in its end markets thanks to the emergence of technologies such as AI.
And that's why it has seen an increase in demand for its architecture licenses. It ended the second quarter of fiscal 2025 with 39 Arm Total Access licenses, up from 33 in the preceding quarter. The number of Arm Flexible Access licensees increased to 269 from 241 in the preceding quarter.
This increase in the number of licenses it's selling bodes well because chips developed using these licenses will result in royalty revenue. The company already gets around 50% of its royalty revenue from chip architectures launched more than 10 years ago.
Management expects its revenue in the current fiscal year to jump to $3.95 billion from $3.23 billion in fiscal 2024, an increase of 22%. Its earnings guidance of $1.55 per share would be a 22% increase from fiscal 2024 levels of $1.27 per share.
The company's growth is expected to accelerate in the next fiscal year, with revenue predicted to jump 25% to $4.93 billion and earnings expected to increase by 32% to $2.05 per share. Analysts forecast this stronger growth will lead to more upside for the stock. The 12-month median price target of $160 would be a 14% jump from current levels.
As such, there is a good chance that it could overtake Palantir's valuation next year, especially considering that Arm's earnings growth then is expected to be stronger than Palantir's estimated bottom-line growth of 25%.
2. Applied Materials
Applied Materials hasn't set the stock market on fire in 2024, having gained just 13% so far this year, but 2025 could be much better for the company. Global spending on semiconductor equipment is expected to increase by a much faster pace of 24% in 2025 following a 4% increase this year, according to the industry association SEMI.
Applied Materials sells manufacturing equipment and provides services and other software for the semiconductor and display industries. The company's revenue in fiscal 2024 (which ended on Oct. 27) increased just 2% to $27.1 billion. Its adjusted earnings, on the other hand, jumped 7% to $8.65 per share.
Consensus estimates are projecting a 9% increase in its revenue in the current fiscal year to $29.6 billion, along with a 10% increase in earnings to $9.54 per share. And there is a good chance the company has stronger growth thanks to the rising demand for AI-related chipmaking equipment.
Management said on its November earnings conference call that the booming demand for memory capacity in AI data centers led to a 60% increase in the company's sales of DRAM (dynamic random-access memory) equipment in fiscal 2024.
This trend is likely to continue as the demand for high-bandwidth memory (HBM) that's deployed in AI data centers is expected to double next year. At the same time, Applied Materials is likely to benefit from the transition to more advanced chipmaking technology for tackling AI workloads, which should increase its addressable market substantially.
All this tells us why analysts are upbeat about the company's prospects over the next year. The stock carries a 12-month median price target of $225, which would be a 23% increase. Given its current market cap of almost $151 billion, it won't be surprising to see it overtake Palantir's valuation over the next year.
Applied Materials trades at just 19 times forward earnings. So, if the market decides to reward its stronger growth with a richer valuation, the stock could easily deliver stronger gains than analysts are estimating.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Applied Materials and Palantir Technologies. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
