The stock’s ascension from $6 to over $100 in just over two years is one of Wall Street’s most incredible hot streaks.
It’s hard to believe that Palantir Technologies (PLTR -0.39%) traded for $6 per share in early 2023. Its share price recently shot past $100 after stellar Q4 earnings underlined the company’s continued momentum in artificial intelligence (AI). As exciting as the ride has been for shareholders, it’s always fair to question a stock that generates such significant returns in so little time.
Those who follow the company will rightfully point out Palantir’s accelerating revenue growth and enormous addressable market. After all, Palantir’s AI software is being used for various applications, ranging from military use to managing supply chains. However, the business and the stock aren’t the same, and it can be problematic when they stretch too far apart.
Three Fools assessed the dynamic between Palantir’s business and its stock to determine whether investors should continue buying shares at these levels.
Here is what you need to know.
Could Palantir become an era-defining company? It’s a question investors should take seriously.
Jake Lerch: Palantir CEO Alex Karp says his company is a “software juggernaut.” I think we should take him at his word.
There are growing signs that Palantir isn’t just a flash in the pan. Indeed, I think this company could become the rarest of things: a company that defines a particular business era. Think Microsoft, Apple, Meta Platforms, and Netflix over the last 20 years.
Granted, those are lofty comparisons. But when you step back and consider the landscape, Palantir is starting to show signs that it can deliver a revolution in its own right.
In its most recent quarter (the three months ended on Dec. 31, 2024), Palantir reported that its U.S. revenue alone increased by 52% year over year to $558 million. Commercial U.S. revenue grew by an even faster rate of 64%.
In short, American companies are simply shoveling money to Palantir for the use of its AI-powered platform. Or, as Karp puts it:
The business we have built has now developed its own internal momentum and strength, its own interior life and forms of untamed organic growth, with the output that we are seeing far surpassing what we are investing.
Like the megacap tech names before it, there seems to be a rush for organizations to get their hands on Palantir’s AI-powered platform to improve margins, increase customer satisfaction, grow sales, or all of the above.
Granted, there are concerns that Palantir’s valuation is too rich, even with its rapid growth. And, fair enough, the stock is expensive — for now. Its price-to-sales ratio of 96 times puts the stock far out of reach for any value investor — and even for most value-conscious growth investors.
Nevertheless, just like Amazon in the early 2000s, valuation may not be a helpful lens in this case, assuming the company in question is forging a new path that can deliver decades of growth.
While it’s still early, I think it’s becoming easier to see why Palantir might be doing just that.
Palantir is firing on all cylinders, but sell it anyway
Will Healy: At first glance, Palantir does not look like a stock to avoid. Indeed, the AI-driven productivity gains delivered to customers appear game-changing, prompting considerable growth in its client base. Also, its earnings report in the fourth quarter of 2024 was phenomenal, pointing to increased revenue growth and rapidly rising profits.
Unfortunately, financial gains are worth only so much, and the increases in Palantir stock have appeared to exceed that growth by nearly every valuation measure. Investors could dismiss the trailing P/E ratio of over 530 since it has only earned a profit for a relatively short amount of time.
Nonetheless, the forward P/E ratio, which is now above 200, indicates the stock price is years ahead of its growth despite a 116% rise in yearly net income over the previous year.
However, the company’s price-to-book value ratio of 51 is arguably the most blatant sign of overvaluation. Although the S&P 500‘s average book value multiple of 5 is at multiyear highs, it is still a tiny fraction of where Palantir’s price-to-book value ratio stands.
Additionally, its book value multiple has caught up to Nvidia, one of the best-performing stocks in the AI industry. Such a level could imply limited upside in the near term.
Indeed, Palantir has found a successful market niche in the AI software space, and investors should expect its revenue and profits to grow at a rapid pace for the foreseeable future.
However, this prosperity has probably caused Palantir’s stock performance to become unhinged from the company’s fundamentals. Until Palantir experiences a significant pullback, investors should consider avoiding this stock.
Putting Palantir’s valuation in perspective
Justin Pope: These situations rarely have an obvious answer. Yes, Palantir is expensive by traditional metrics, but as Jake just discussed, history has shown that exceptional companies can defy conventional wisdom. It’s still too early to make that call on Palantir, but the business is well on its way. Its uniquely flexible software intersects with an AI opportunity that some estimate will create trillions of dollars in economic value over the coming years.
But sometimes, the stock moves faster than the business, which can cause trouble. Right now, Palantir’s market cap is roughly $250 billion. The company generated $2.87 billion in revenue in 2024. To give some perspective to that, Palantir is now a larger company than some of the world’s most prominent businesses, including McDonald’s, Cisco, and Adobe:
PLTR Revenue (TTM) data by YCharts
Yet, as you can see above, Palantir does only a fraction of the revenue. These are all different business models, but all three are highly profitable and have outstanding track records of sustained growth. When you buy Palantir today, you’re essentially banking on Palantir to follow suit. Maybe Palantir will keep growing and eventually earn more revenue and profits than all these companies. If so, it’s still hard to deny that much of the company’s future success is reflected in the stock now.
There’s a good chance that the stock is more likely to go down than up from here, at least in the short term. Valuations act like gravity, pulling harder the further they get into the stratosphere. Investors should consider waiting for a pullback to buy the stock, or at the very least, buy slowly to leave some cash handy. Stocks that go up this far, this fast, often pull back hard, too.
