Why Palantir Stock Continued to Plunge Today

Key Points

• Palantir stock is one of several that investors have been selling in a recent rotation out of AI.

• Its valuation got far beyond even that of other high-growth AI stocks.

• Palantir's forward P/S ratio is still about 4 times higher than that of Nvidia.

• 10 stocks we like better than Palantir Technologies ›

Palantir Technologies (NASDAQ: PLTR) has been a big winner for investors over the past year. Some shareholders are now cashing in. The stock has been plummeting over the past two weeks, and that trend continued today.

Shares of the artificial intelligence (AI) software company dropped as much as another 6% Monday morning. Even after paring some of that decline, shares are lower by 16% over a two-week span, including the 1.6% drop as of 12:30 p.m. ET today.

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Palantir stock is coming back to earth

Palantir's software helps enterprises and government agencies integrate, manage, and analyze large amounts of data. Growth from both the government and commercial sectors has investors excited about its long-term potential.

But the stock has gotten far ahead of the business, and Palantir is now caught up in a broader rotation away from AI-related stocks as valuations soar. While high-growth stocks often warrant higher valuations, Palantir has stood out among them.

Business has been booming, and co-founder and CEO Alex Karp called the second quarter a "phenomenal quarter." He added, "We are guiding to the highest sequential quarterly revenue growth in our company's history, representing 50% year-over-year growth."

While that growth is rapid, investors had already bid the stock higher than it deserved. A forward price-to-sales (P/S) ratio of almost 90 means it would require many years of that level of growth to justify anything close to that valuation. By comparison, AI leader Nvidia has a forward P/S of about 20.

Investors looking to add Palantir as a long-term holding might very well still find a better price in the future. A strategy to make incremental purchases or to buy in thirds is probably the best approach with this high-flying stock.

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Howard Smith has positions in Nvidia and has the following options: short October 2025 $160 calls on Nvidia. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.