Palantir's Soaring Valuation-Justified or Overhyped?

Any analysis of Palantir Technologies Inc. (NASDAQ: PLTR) inevitably returns to valuation. Investors are told that fundamentals matter, and then they look at what’s going on with PLTR stock. It’s the top-performing stock in the S&P 500, soaring to a new all-time high since the company reported earnings on August 4.

Palantir had a strong report, with one of the highlights being its Rule of 40 score, which came in at an eye-popping 94%. That went along with revenue and earnings that came in above estimates, higher year-over-year (YOY), and bullish forward guidance. 

The company is also showing strong growth in its business's commercial and government sides.

Still, it’s hard to consider getting involved with PLTR stock when it’s trading at a price-to-earnings (P/E) ratio around 616x and a price-to-sales (P/S) ratio around 150x. Even for technology stocks that are known for premium valuations, a share price over $184 means investors are paying a lot for the company’s future earnings.

But what if conventional metrics don’t tell the whole story? In a digital-first economy, the traditional tools for valuing companies, especially GAAP-based accounting, can systematically understate the long-term earnings power of businesses like Palantir.

Why This Time May Be Different

It’s always dangerous to contradict years of market history with the phrase “this time it’s different.” However, you can look back to the dot-com era and Amazon, or more recently to NVIDIA, to find examples of companies that traded at lofty valuations until their revenue models matured and earnings caught up.

As those examples showed, many classic accounting measures and regulations were designed for an agrarian and/or industrial economy. Those rules don’t correlate easily to the digital economy.

For example, Palantir’s most significant assets include its proprietary software, artificial intelligence models (LLMs), and a platform that’s baked into how customers run their operations. But these don’t show up on the company’s balance sheet. Instead, in a digital economy, they get booked as expenses immediately. That comes at the expense of current profits, which inflates the company’s P/E ratio.

Palantir’s growth is still in the early stages. Despite another quarter with over 100 new contracts signed, the company’s Artificial Intelligence Platform (AIP) is still early in the adoption phase.

Chief Executive Officer (CEO) Alex Karp quipped that the company may have to turn away business if the demand is so strong.

That's not likely, but it does add credibility to the fact that the company has rapid growth potential. For example, Palantir earned 31 cents per share (EPS) in its fiscal year (FY) 2024. Through the first two quarters of FY2025, it’s already delivered 29 cents in EPS. At that pace, EPS will nearly double year-over-year (YOY). That would bring the P/E ratio down sharply even if the stock price doesn’t change.

The Bears Have a Case

Even if you believe that Palantir’s value goes beyond traditional metrics, there are reasons for concern. The company reported 48% YOY revenue growth in the current quarter. However, the company would have to keep up that growth over an extended period to justify the valuation. Statistical probability suggests that some regression is likely.

Also, although the company’s commercial business is expanding, Palantir still generates over 50% of its revenue from government contracts. Bulls will say Palantir has become the government's operating system. However, it’s fair to note that government deals can be vulnerable to budget changes.

And then there’s the question of stock-based compensation (SBC). But it’s not for the reason some investors may think. One element of Palantir’s Rule of 40 score is based on its adjusted operating margin, which adds back non-cash expenses such as SBC.

The counterargument would be that, as the Palantir stock price continues to climb, SBC may not be as attractive a tool for recruiting talent. Plus, Palantir is actively seeking to cut its workforce.

Chasing PLTR Stock? The Choice is Yours

Palantir is priced for perfection—or for a future in which perfection is within reach. However, even if you overlook Palantir’s lofty valuation, it may be too expensive for many investors.

New investors can consider a starter position. This means making a small allocation and scaling it higher if the company continues to display strong execution.

However, this is only for investors with a long time horizon who can handle volatility. Many retail investors holding PLTR stock are doing so with a long-term focus. The belief is that Palantir’s growth is measured in years, not quarters.

Finally, no matter the size of your position, investors should continue to expect volatility. PTLR stock dropped 40% between February and April when investor sentiment towards the AI trade soured. Dips like that are likely, with a stock that is priced for perfection.

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