Palantir (NASDAQ: PLTR) has a reputation for being an overvalued stock. It came by that reputation honestly, as it truly was one of the most expensive stocks on the market by the standard valuation metrics for a while. However, with the stock now down by around 30% from its all-time high, is it still overvalued, or might it actually have entered buying territory?

Palantir didn’t soar to a lofty premium for no reason. It is one of the premier AI application companies and has been integrating AI into its products since its inception. Originally, its products were tailored for government use and saw heavy utilization in the military and intelligence sectors. Even now, they are seeing massive use in these areas, and they have been heavily utilized during the Iran war. Palantir eventually expanded into other government use cases and into the commercial world as well. While government revenue still accounts for the majority of Palantir’s top line, commercial revenue is now a significant part of the business.

Palantir really took off over the last few years, after it rolled out its Artificial Intelligence Platform (AIP). AIP is Palantir’s agentic AI service, and can help clients automate tasks that people normally do. This truly kick-started Palantir’s growth again, and the company hasn’t looked back since.

Each quarter, Palantir has posted faster and faster growth rates, and Wall Street analysts expect that trend to continue.

Next quarter, analysts forecast 74% revenue growth. That’s an impressive run, and with Palantir being a subscription-based platform, its revenue isn’t at risk unless a dramatically better rival offering comes out. Even then, Palantir’s deep integration within government systems makes its software nearly irreplaceable for its largest customer.

As another bonus for investors, the company has posted some incredibly high net income margins, with Q4’s coming in at a record 43%.

Palantir has everything an investor could want: A leading and sticky product in an important market, rapid and accelerating revenue growth, and fantastic profit margins. The only problem is the valuation.

The question is, how much are all of those factors worth? To some, the combination could be nearly priceless; to others, it may be worth something like 30 to 40 times earnings. Currently, Palantir sports a hefty premium of 231 times trailing earnings and 111 times forward earnings.

That’s a high price to pay for any stock, no matter how you break it down. When it comes to cases like this, I like to calculate how many years of growth are baked into the stock price — in other words, how long it would have to keep putting up business gains at its prior rates before its current share price would be reasonable. In my view, a company like Palantir is worth about 40 times earnings. The market is already pricing in its earnings doubling this year, and to get its P/E ratio down to 40, Palantir would need to increase its profits by about 150% from what’s projected at the end of this year.

I expect that could take anywhere from three to four years to achieve, and when a stock has that many years of growth priced into it, I get very concerned. Four years ago, nobody saw that AI was going to take the stock market by storm (outside of people working in the industry). So I recognize that accurately projecting what the tech industry or the stock market will look like four years into the future is nearly impossible. As a result, I still think Palantir is overvalued. I would need the stock to fall a lot further before I’d be interested in buying it, and today’s price just doesn’t do it for me.

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

Is Palantir Stock Still Overvalued? was originally published by The Motley Fool