Palantir Technologies (PLTR 3.05%) has been one of the top-performing artificial intelligence (AI) stocks in the market. It's up nearly 400% since the start of 2024 and is actually up around 10% for the year despite tumbling around 30% from its all-time high established in mid-February. Despite these returns, I want no part in Palantir stock right now.
This may come as a surprise, but I think the market has gotten ahead of itself with Palantir, and a further downturn could be right around the corner.
Palantir's AI platform is starting to become more popular
Palantir has been around for a long time, and its artificial intelligence (AI)-powered data analytics software suite has become quite popular. Originally, its products catered to the government, but its business expanded to include the commercial sector. This dual growth path worked out well for Palantir, as its revenue rose steadily since 2024.
PLTR Operating Revenue (Quarterly YoY Growth) data by YCharts
The biggest takeaway is that Palantir's revenue growth is still accelerating, which investors love to see. In the first quarter, management expects to grow revenue by 36%, but that's probably an underestimation. Palantir's management has a history of guiding a bit lower to deliver a revenue beat each quarter. This is far better than the over-guiding and underperforming alternative, so I won't deduct anything from management for doing that. However, it's something investors need to keep in mind if Palantir's growth comes in at 36% or lower; the market could be disappointed, as outperformance is becoming the expectation for Palantir.
However, if you look at the stock valuation, outperformance is necessary to justify the stock price.
Palantir's stock price is too expensive for its performance
With Palantir's most recent revenue growth rate coming in at around 36%, the stock rising nearly 400% over the past year should throw red flags up for investors. The business growth rate is nowhere near the stock growth rate, which could be a clue that the stock is significantly overvalued.
When you examine Palantir's price-to-sales (P/S) ratio, this could be the case.
PLTR PS Ratio data by YCharts
In early 2024, Palantir's stock traded for a low of 16.5 times sales, which is toward the higher end of where software companies normally trade (10 to 20 times sales). At 77 times sales, Palantir needs to be putting up unbelievable growth rates, which it isn't doing. I'm not going to harp on the 36% growth that the company is putting up right now; that's a very strong and impressive rate. However, for the stock to trade for 77 times sales while growing at that level isn't sustainable.
There's a ton of growth baked into the stock, and unless Palantir is tripling its revenue year over year, it really isn't justifiable.
NASDAQ: PLTR
Key Data Points
For example, let's say Palantir can grow its revenue at a pace of 40% over the next five years. That's a quicker pace than it's growing and would have to be sustained for a long time. If Palantir did that, it would generate $15.4 billion in revenue and trade at 13.6 times sales. So, for Palantir's valuation to return to a normal level, it needs to grow at a quicker pace for a long time and not have the stock price rise from today's levels at all.
That shows how much growth is baked into a stock that trades for 77 times sales, and it's the primary reason why I wouldn't go for Palantir's stock. The company is fantastic and will probably grow strongly over the next few years, but with the stock already having all of that success baked into it, there's no sense in me owning it.
