AI and data analytics software major Palantir (NASDAQ:PLTR) has been among the best-performing stocks of the last 12 months, generating an incredible return of over 490% for its shareholders.
While those who bought PLTR early are sitting on massive gains, this sudden run-up raises questions about whether the market has bid Palantir up well above its fair price.
Is Palantir overvalued now, or can the business keep growing fast enough to keep up with extremely optimistic investor expectations?
Growth Has Been Nothing Short of Extraordinary
Without considering the share price or multiples, Palantir on its own appears to be a fundamentally remarkable business.
Having staked out a leading position in providing AI and data analysis as a government contractor while also building out a base of commercial contracts, Palantir has managed to achieve and sustain a streak of very high growth rates.
Between 2020 and 2024 alone, the business’ annual revenues rose from $1.1 billion to $2.9 billion. Management also reported net profitability during that time and now has a trailing 12-month EPS of $0.23.
Palantir’s growth streak extended in Q1, with total revenues rising 39% to $884 million and US revenue rising even faster at a growth rate of 55%. Most impressive of all was Palantir’s US commercial revenue, which increased by 71% to a total of $255 million.
Even though management has focused heavily on bringing in new commercial customers, Palantir has also been able to secure substantial new government contracts recently.
Among the most prominent of these was a $795 million contract from the US Army. Palantir is also being tapped by the Trump administration for projects related to immigration enforcement and may be used to create a more unified government data system for managing the data of US citizens.
Palantir is even expected to keep its high earnings growth rates up for the foreseeable future, with a 31% annualized EPS growth rate expected to prevail for the next 3-5 years. Using the trailing 12-month earnings of $0.23 per share as a starting point, this would see Palantir earning approximately $0.89 per share five years from now.
PLTR’s Problematic Pricing
It’s far from surprising to see a business that has grown as explosively as Palantir and which still has such strong growth prospects ahead of it trading at a premium to the stock market at large.
In Palantir’s case, however, the premium may simply be too high for even an exceptional business to justify. PLTR shares are trading at nearly 600x earnings, 110x sales, 60x book value and 260 times operating cash flow.
The 5-year expected price-to-earnings-growth ratio of 6.5 also looks very high, implying that Palantir may be priced at a large premium even when its long growth runway is taken into account.
Analyst ratings also seem to suggest that PLTR may have risen above the point where even its excellent performance can justify its price. The consensus target price for PLTR right now is just $101.32, implying a downside of over 26% from the most recent price of $137.40.
While the highest standing price target of $155 would still give Palantir room for an upside of about 13%, most analysts are far more conservative in their estimates. Even institutional investors have somewhat muted their buying activity, and the levels of buying and selling from institutions have been close to even since late last year.
Very few stocks can successfully maintain the kind of P/E ratios that Palantir is currently trading at. Even at its peak in 2023, NVIDIA, arguably one the greatest business and investing success stories of the last 20 years, “only” traded at around 150 times its earnings.
Though worries about NVIDIA’s overvaluation at that time proved to be misguided, it’s somewhat telling that even the most dominant pick-and-shovel play on AI didn’t approach PLTR’s earnings multiples and that its P/E ratio has stabilized at a far more reasonable multiple of around 45 times earnings today.
Will Palantir Crash?
Although Palantir has reported stunning multiples, the multiples its stock currently commands seem to suggest that a crash will occur at some stage in the next 12 months.
At several hundred times earnings, Palantir would have to keep an extremely high rate of growth up over a very long period of time to justify the multiples it trades at. Moreover, the stock’s sky-high valuation could leave it limited room to move further upward, potentially limiting its appeal to investors who haven’t already locked in a lower cost basis.
To get a sense of just how overvalued PLTR could be, consider a discounted cash flow analysis that assumes a 31% rate of EPS growth that eventually levels off to 7% against a discount rate of 10%.
Even using these very optimistic assumptions, Palantir must sustain the rate of growth expected from it for the next five years for more than 15 years to be fairly valued at today’s prices. Under even moderately less ideal conditions, the stock’s fair value would be far lower.
Even stock market history strongly suggests that Palantir won’t be able to keep its present valuation up indefinitely. Highly-valued software stocks are notoriously prone to selloffs that can be just as drastic as their bullish runs.
While there’s no guarantee that Palantir will follow the trend of exciting software firms becoming markedly overvalued and then selling off sharply, the fact that it’s trading at such massive multiples to both sales and earnings seems to set it up for a fall.
On the whole, there is a very good argument to be made that Palantir is not just overvalued but perhaps even drastically overvalued. Even though the business is performing exceptionally well, PLTR bulls appear to have driven the stock up to a point that requires an absolute best-case growth scenario to keep going over many years.
Given that very few businesses end up being able to sustain such high growth rates without periods of difficulty, Palantir seems to be trading at prices it likely cannot justify at the moment.
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.