AI and data analytics major Palantir (NASDAQ:PLTR) has become something of a Rorschach test for the AI trade. To investors bullish on the long-term power of artificial intelligence, Palantir represents an early opportunity to get in on what could be a dominant business in the AI field for years to come. A bearish view rooted in more traditional business valuation, however, suggests that Palantir could be among the most overvalued stocks in market history. Today, let’s examine PLTR in light of its soaring prices over the past few years to see if Palantir stock is likely to crash or if investors will see another year of surging returns in 2026
Palantir’s Quality as a Business
Although there are some fairly significant concerns around Palantir’s price tag, it’s very hard to dispute its performance. Using Q3’s earnings report as an example, Palantir posted overall revenue growth of 63 percent to $1.18 billion. Palantir also continued its push to build commercial revenue, helping it get away from reliance on government contracts. Q3 saw enormous progress in this initiative, with US commercial revenue rising 121 percent to $397 million.
Just as impressive was Palantir’s ongoing acquisition of new contracts to drive future revenue growth. The business closed $2.76 billion worth of new contracts in Q3, including $1.31 billion in US commercial contracts. Adjusted free cash flow in Q3 totaled $540 million, representing a 46 percent margin.
Palantir has also achieved very respectable levels of profitability in a relatively short time. In Q3, the business reported GAAP net income of $476 million. Trailing 12-month net margin stands at 28.2 percent, while its returns on invested capital and equity are 18.9 percent and 19.7 percent, respectively. The business even has a fortress balance sheet that features over $6 billion in cash and equivalents and less than $200 million in long-term debt.
Analysts also expect strong earnings growth to be a hallmark of Palantir for several years to come. Over the next few years, estimates call for compounded annual EPS growth of more than 45 percent.
How High Has PLTR’s Valuation Gotten?
Even after rising by over 115 percent in the last 12 months, Palantir shares are still priced at an astronomical P/E of nearly 400 and a price-to-sales ratio of almost 110. Incredibly, analyst price targets not only support this valuation but also suggest further upside in the stock. The consensus price target for PLTR is currently $190.25, implying a further upside of nearly 15 percent from the last price of $165.90.
It is important to recognize that Palantir has shown a fairly remarkable capacity to sustain extremely high valuations over long periods of time. Since the business achieved profitability in 2023, PLTR has spent relatively little time trading at less than 200 times earnings. Palantir does, however, look more expensive than it historically has in terms of its P/S ratio.
With that said, Palantir’s price tag gives it remarkably little leeway for periods of slower growth. While Palantir’s performance up to this point hasn’t required much room for error, the question remains of whether the stock can maintain such a high valuation over a period of several more years. It’s also worth noting that the booming share prices of the past few years have coincided heavily with a period of extreme bullishness on AI that may not last indefinitely.
Growing Signs of Strained Pricing
It’s also notable that much of the support for PLTR right now is coming from retail investors, while institutions and even some of the most well-known investors on Wall Street have gotten out of the stock. Although institutional investors were loading up on the stock heavily during its earlier run in the second half of 2024, the amount of institutional buying and selling has been nearly identical over the last six months. Investing legend Stanley Druckenmiller also exited his position in PLTR last year, simultaneously selling off NVIDIA.
Another possible sign of pricing strain is the performance of the stock over the last few months. Since the release of its Q3 earnings report in early November, Palantir has stagnated and drifted slightly downward, bringing its trailing 3-month return to -5.5 percent. Although the stock is still up massively over the last year, this could suggest that even the extremely positive results reported for Q3 were insufficient to push it above what was already an extremely high valuation.
Palantir’s Exposure to an AI Selloff
Because of the enormous amount of future growth that’s currently priced into the stock, PLTR could be one of the most at-risk stocks if the market’s multi-year AI bullishness comes to an end in 2026. AI is facing growing skepticism as an increasingly bubble-like ecosystem of circular purchase agreements forms among the businesses at the top of the market and earnings growth from AI remains elusive for many firms.
If the AI bubble does pop this year, the losses for Palantir shareholders could be severe. For reference, the most bearish price target currently assigned to Palantir is $50, implying a loss of nearly 70 percent and taking the stock back to prices last seen in late 2024. Interestingly, even such a large loss would still leave the stock trading at over 100 times its trailing earnings.
So, Will Palantir Stock Crash?
While Palantir has proven surprisingly resilient up to this point, the stock’s boom seems to be slowing as investors become more skeptical of ultra-high valuations attached to AI businesses. Barring performance that surpasses even the extremely positive expectations already baked into PLTR’s share prices, it seems quite possible that the stock will either stagnate or decline from its current pricing under anything less than ideal conditions.
Despite its almost unquestionable quality as a business, Palantir is still commanding an overall market capitalization of almost $400 billion on revenues of less than $3 billion and net income of only a little over $1 billion. At these prices, PLTR could sell off by a significant amount and still look very expensive. While the stock may not experience a sudden crash unless it turns in a significantly worse-than-expected earnings report or the market turns drastically less bullish on AI, Palantir’s pricing may be setting it up for a substantial fall.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.