Palantir Stock Is on a Crash Course With History That Will Likely Be Very Costly for Investors

Palantir Technologies (NASDAQ: PLTR) has created astounding wealth for shareholders in a very short period. It was the best-performing member of the S&P 500 (SNPINDEX: ^GSPC) last year, and the company is leading the index higher again this year. In total, Palantir stock has returned 695% since January 2024 and 2,000% since January 2023.

However, Palantir is also the most expensive stock in the S&P 500, as measured by price-to-sales ratio. In fact, it is one of the most expensive software stocks in recent history, and other every other software stock that had a similar valuation in the last two decades eventually crashed.

Here's what investors should know.

Image source: Getty Images.

Palantir is on the leading edge of the artificial intelligence platforms market

ChatGPT showed that artificial intelligence (AI) systems could not only generate media content and engage in conversation, but also reason through problems and give concise answers to complex questions. It became the fastest-growing consumer application in history after its launch in late 2022, and businesses have since been racing to infuse their products with generative AI.

Palantir was ideally positioned to capitalize on that trend. The company already developed analytics solutions, so introducing an adjacent artificial intelligence platform that let users engage data conversationally was a natural next step. Palantir introduced such a product in 2023. Its Artificial Intelligence Platform (AIP) is a large language model orchestration tool that lets businesses apply generative AI to their operations.

The company says it is uniquely positioned to meet demand for AI because it has spent years developing its ontology-based software. To elaborate, an ontology is a framework that connects digital data to real-world assets, creating a feedback loop that lets users identify nuanced insights that continuously improve to support better decision-making over time.

AIP lets businesses interact with ontology data in natural language, making it easy to apply generative AI to analytics workflows. Palantir CTO Ryan Taylor said last year, "Our unique capability lies in moving from prototype to production." In other words, Palantir sees its software as better suited than competing products to helping businesses build AI tools.

Forrester Research recently recognized Palantir as the technology leader in artificial intelligence and machine learning platforms. And AI platform sales are forecast to increase at 41% annually through 2028, according to International Data Corporation. That puts Palantir on a glidepath to strong revenue growth for years to come.

History says Palantir stock will eventually suffer a devastating crash

Palantir hit a record high of $136 per share on June 11. On the same day, its price-to-sales (P/S) ratio reached a record high of 109. The next-closest stock in the S&P 500 is Texas Pacific Land, at 35 times sales. Palantir is three times more expensive, so its price could fall 67% and it would still be the most expensive stock in the S&P 500.

In fact, Palantir is one of the most expensive software stocks in recent history. I reviewed valuations of more than 50 software companies during the last two decades, and only five ever achieved P/S multiples above 105:

• Cloudflare traded at 114 times sales on Nov. 18, 2021. The stock eventually declined 83%.
• SentinelOne traded at 106 times sales on Sept. 16, 2021. The stock eventually declined 82%.
• Snowflake traded at 184 times sales on Dec. 8, 2020. The stock eventually declined 72%.
• SoundHound AI traded at 111 times sales on Dec. 26, 2024. The stock eventually declined 70%.
• Zoom Communications traded at 124 times sales on Oct. 19, 2020. The stock eventually declined 90%.

These stocks have something in common, apart from achieving a valuation above 105 times sales: Every single one eventually fell at least 70% from their peak valuation, with an average peak-to-trough decline of 80%. We can apply that figure to Palantir to make an educated guess about the future.

Specifically, Palantir traded at $136 per share when it hit its peak valuation of 109 times sales. So, if its performance matches the historical average, the stock will eventually fall 80% to $27 per share.

Here's the big picture: Palantir is an excellent business that should continue to benefit as enterprises invest in artificial intelligence. But investors need to differentiate between the business and the stock. Right now, the stock trades at an absurdly expensive valuation, which means the risk-reward profile is heavily skewed toward risk.

To be clear, Palantir stock may continue soaring from here. No one can predict the future. But valuation always (eventually) matters to the market, and history says Palantir is on a crash course with history. Every other stock that has achieved a similar P/S ratio in the last two decades has eventually crashed.

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Trevor Jennewine has positions in Palantir Technologies. The Motley Fool has positions in and recommends Cloudflare, Palantir Technologies, Snowflake, and Zoom Communications. The Motley Fool has a disclosure policy.