Palantir Technologies: 3 Motley Fool Contributors Weigh In

Key Points

• Investors should probably anticipate more volatility.

• Yes, valuation matters with Palantir stock.

• The shares have experienced several large corrections over the last three years.

• 10 stocks we like better than Palantir Technologies ›

Over the last year, Palantir Technologies (NASDAQ: PLTR) has emerged as one of the more closely followed names in artificial intelligence (AI). Thanks to the productivity gains achieved by the company's Artificial Intelligence Platform (AIP), the stock has increased by about 400% over the last year.

Today, the question for investors is how they should approach the software-as-a-service (SaaS) stock. Three Motley Fool contributors have their own views on whether investors should buy more shares, hold, or begin unloading their positions.

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Palantir's recent dip is a reminder that stock prices don't just go up

Justin Pope: It's been a fun ride these past few years for anyone holding Palantir Technologies in their portfolio. The stock has risen an astonishing 2,300% since the start of 2023, when AI really began to pick up steam.

The stock's gains have been meme-worthy, but Palantir is far from a meme stock. The company has built on the government relationships of its early years.

At the same time, commercial customers have begun flocking to it for custom AI applications capable of seemingly endless possibilities, ranging from optimizing supply chains for manufacturers to improving power grids for utility companies. As a result, revenue growth has continually accelerated since the middle of 2023:

Data by YCharts; TTM = trailing 12 months.

The continuous acceleration has steadily lifted Wall Street's expectations, making this an excellent opportunity to step back and evaluate the big picture. Palantir's market cap is currently $367 billion, a staggering valuation for a business with less than $4 billion in sales over the past four quarters. Historically, stocks typically don't sustain such high valuations, with price-to-sales ratios exceeding 75 to 100.

Can Palantir do it? Perhaps. Still, such high valuations are like a rubber band stretched to its limit. Even if it doesn't snap, the slightest bad headline or indication of slowing business performance could hurt the stock price in a big way. In other words, investors should expect volatility, even if the company remains a winner over the long term.

AI has arguably become the stock market's hottest growth trend, but investors should carefully consider the risks of investing in Palantir at such high valuations and prepare for a roller coaster ride if they choose to hop aboard.

A stock in bubble territory

Will Healy: Saying a stock is in a "bubble" when the price is near its peak seems premature at best. Investors tend to identify bubbles after the fact, as was the case with Japan's Nikkei stock index in the 1980s and Cisco Systems in 2000.

Although investors may not feel ready to say Palantir is in a bubble just yet, the company appears pricey when measured by the most common valuation metrics.

As of now, its price-to-earnings ratio (P/E) is around 514, and comparing it to its forward P/E of 241 indicates rapid growth and a stock price that is far ahead of fundamentals.

Its price-to-sales ratio (P/S) of 114 appears to confirm this, especially considering that the average P/S for the S&P 500 is 3.2. That sales multiple is so high that Palantir stock would arguably still be expensive at one-tenth of its current price.

Investors need to compare that valuation against what the company offers. AIP allowed one insurer to reduce a two-week workflow to three hours. It also helped one client achieve more in one day than a hyperscaler had in four months. Given those productivity gains, it is natural that investors would bid up the stock price.

Unfortunately, valuation matters at some point, and a "valuation doesn't matter" attitude could trap even the longest-term investors.

Going back to the Nikkei, it peaked in December 1989 and would not reach its record high again until February 2024. Investors should also note that Cisco stock is 17% below its peak price in March 2000. Very few investors can afford to wait out such events.

Ultimately, it is natural for them to want to capitalize on Palantir's AI-driven productivity gains. Still, a 514 P/E likely puts it in bubble territory, and with valuations years ahead of its fundamentals, investors should probably consider selling.

Uncertainty always surrounds companies on the cutting edge

Jake Lerch: For me, the big reason Palantir stock has taken a hit in recent weeks is clear: It's all down to uncertainty. There is -- and has been -- a tremendous amount of uncertainty surrounding the stock for years.

How big is its total addressable market? How profitable can the company be in the long term? How quickly will its revenue grow?

For the most part, these questions exist for every public company. However, since Palantir operates on the cutting edge of AI, and its stock has skyrocketed in recent years, it's easy for bears to claim that its stock -- and the AI sector more broadly -- is just a big bubble ready to pop.

I'd push back on that for two reasons. First, let's remember that Palantir is highly volatile. Enduring this volatility is part of the process. The stock has experienced seven declines of at least 15% (from all-time highs) in just the last three years. Nevertheless, over that period, it's up nearly 2,000%. In other words, long-term investors need to be comfortable with frequent drops.

Second, the "AI is the new dot-com bubble" comparisons are once again popping up. Granted, stock valuations are high across the board right now, and particularly within the AI sector. Palantir, for example, has a P/S of 114. That's extremely high, but it doesn't convince me that AI is a bubble. Here's why.

Many of the companies in the run-up to the dot-com bubble lacked profits -- some even lacked meaningful revenue. In turn, when market sentiment turned south, these companies had nothing to fall back on. Palantir, on the other hand, has generated $3.4 billion in revenue, $1.7 billion in net income, and nearly $800 million in free cash flow over the last 12 months.

In summary, Palantir's stock might be pricey; it may even be destined to drop further. However, it -- and the AI sector -- are no mirage. Therefore, long-term investors shouldn't allow the recent volatility to shake their confidence.

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Jake Lerch has the following options: long September 2025 $155 calls on Palantir Technologies and long September 2025 $155 puts on Palantir Technologies. Justin Pope has no position in any of the stocks mentioned. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cisco Systems and Palantir Technologies. The Motley Fool has a disclosure policy.