Is Palantir Stock in a Bubble?

Shares of AI and data analytics giant Palantir (NASDAQ:PLTR) have seemingly defied gravity over the last year. During that time, the stock has surged by almost 370 percent as a result of ongoing AI enthusiasm and a series of extremely positive earnings reports.

The question, though, is whether Palantir can hold its ground after the wildly positive returns it has generated or if the stock has turned into a bubble ready to burst.

A Quick Look at PLTR’s Valuation

One of the first things we can look at to get a sense of whether PLTR could be in a bubble or not is its slate of valuation metrics. At the moment, Palantir trades at 583 times earnings, 95 times sales and 50 times book value, all of which are astronomical ratios by most standards. Even the company’s price-to-earnings-growth ratio is a concern at a multiple of 5.3.

It’s also worth noting that the market has taken PLTR shares far past the prices that most analysts believe are fair for the stock. At $110.85, Palantir already trades more than 25 percent above the average price target of $82.85. Even the highest price target standing at the moment is $125, giving Palantir an upside of a little under 13 percent in a perceived best-case scenario.

Can Palantir Keep Growing Quickly Enough to Avoid a Correction?

With its valuation sky-high, Palantir’s ability to sustain its prices will likely depend almost entirely on its ability to keep delivering extremely high levels of growth. Here, it’s worth acknowledging that Palantir has an excellent track record when it comes to growth.

Since the end of 2021 alone, Palantir has been able to scale its trailing 12-month revenues from $1.5 billion to $2.9 billion. While revenue growth rates slumped to as low as 12.7 percent in mid-2023, they have since regained momentum and risen to over 30 percent year-over-year.

Q4 was another extremely strong quarter for Palantir, with revenues of $828 million representing a 36 percent improvement on the year-ago quarter. GAAP net income took a modest step backward, but the company was still able to deliver $0.03 in earnings per share. On an adjusted basis, Palantir reported income of $0.14 per share.

Palantir is also doing extremely well when it comes to acquiring high-dollar contracts. One of the highlights of the Q4 earnings report was the revelation that the company had closed 32 new deals worth $10 million or more. This news comes alongside continued success in Palantir’s efforts to break into the commercial market and diversify away from its government-heavy contract base. For the full year of 2024, the company’s US commercial revenues increased by 54 percent, compared to a 29 percent jump in overall revenues.

Investors will also be pleased to note that Palantir’s growth isn’t expected to slow down in the near future. For FY2025, management projects revenue of $3.74-$3.76 billion, an increase of about 30 percent from FY2024. Analysts project a 5-year compounded earnings growth rate of about 25.6 percent, suggesting that Palantir is likely to do extremely well through the rest of this decade.

Palantir’s AI-driven data analytics services are also likely to remain in high demand for many years to come. As businesses continue to invest in new methods of deriving insights from their data, Palantir will likely be in a strong position to benefit as an early mover with a strong reputation. This is especially true in light of the company’s growing presence in the commercial market, which opens up an entirely new base of extremely valuable customers.

Bulls May Be Charging, But Some Smart Money Has Already Left the Party

Institutional interest in Palantir has been very strong as the stock’s price has surged, with institutions having bought over $157 billion of the stock and sold just $79 billion in the last six months. This interest is hardly surprising, especially in light of the strong results the company was able to deliver in the last two quarters.

Some very notable investors, however, have signaled that they don’t believe Palantir can keep rising. Stanley Druckenmiller, for instance, sold nearly 95 percent of his PLTR holdings late last year. Ken Griffin also sold more than 90 percent of his stake around the same time. The fact that investing giants like Druckenmiller and Griffin are exiting their positions in Palantir could be another sign that the stock has reached the logical limits of its valuation for the time being.

Is Palantir Stock in a Bubble?

Trading at 583x earnings, 95x sales Palantir has the hallmarks of being in a bubble given that growth forecasts are just 30%.

With that said, bulls will say the stock’s extremely high returns have been driven by improvements in the business that are altogether real. Palantir’s revenue growth, in particular, has been nothing short of incredible. Moreover, the company has given investors reason to believe that its winning streak is far from over.

That said, a stock doesn’t have to be in a bubble to be overvalued, and Palantir shows several signs of trading well above its fair price. The extremely high valuation multiples at which PLTR is priced will likely require years of unusually strong growth to fully justify. If Palantir stumbles or macroeconomic conditions change for the worse, Palantir’s pricing could make it vulnerable to corrections.

These risks are illustrated by the fact that Palantir’s valuation multiples have risen far faster than its actual performance. Although the stock has always carried high prices driven by growth expectations, both the P/E ratio and P/S ratio have surged to record highs since Palantir’s Q4 earnings came out. In other words, the growth demands the market is placing on Palantir are expanding faster than the company itself.

It’s virtually impossible to argue that Palantir isn’t an excellent business with very strong growth opportunities in front of it. Where PLTR falls down, however, is in its pricing. The market has already baked in a nearly best-case scenario for Palantir to such a degree that the company has very little room for any kind of missteps. So, while Palantir probably isn’t in a true bubble, the stock’s price may make it a better hold than a buy in today’s market.

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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.