Nevertheless, just like Amazon in the early 2000s, valuation may not be a helpful lens in this case, assuming the company in question is forging a new path that can deliver decades of growth.
While it's still early, I think it's becoming easier to see why Palantir might be doing just that.
Will Healy: At first glance, Palantir does not look like a stock to avoid. Indeed, the AI-driven productivity gains delivered to customers appear game-changing, prompting considerable growth in its client base. Also, its earnings report in the fourth quarter of 2024 was phenomenal, pointing to increased revenue growth and rapidly rising profits.
Unfortunately, financial gains are worth only so much, and the increases in Palantir stock have appeared to exceed that growth by nearly every valuation measure. Investors could dismiss the trailing P/E ratio of over 530 since it has only earned a profit for a relatively short amount of time.
Nonetheless, the forward P/E ratio, which is now above 200, indicates the stock price is years ahead of its growth despite a 116% rise in yearly net income over the previous year.
However, the company's price-to-book value ratio of 51 is arguably the most blatant sign of overvaluation. Although the S&P 500's average book value multiple of 5 is at multiyear highs, it is still a tiny fraction of where Palantir's price-to-book value ratio stands.
Additionally, its book value multiple has caught up to Nvidia, one of the best-performing stocks in the AI industry. Such a level could imply limited upside in the near term.
Indeed, Palantir has found a successful market niche in the AI software space, and investors should expect its revenue and profits to grow at a rapid pace for the foreseeable future.
However, this prosperity has probably caused Palantir's stock performance to become unhinged from the company's fundamentals. Until Palantir experiences a significant pullback, investors should consider avoiding this stock.
Justin Pope: These situations rarely have an obvious answer. Yes, Palantir is expensive by traditional metrics, but as Jake just discussed, history has shown that exceptional companies can defy conventional wisdom. It's still too early to make that call on Palantir, but the business is well on its way. Its uniquely flexible software intersects with an AI opportunity that some estimate will create trillions of dollars in economic value over the coming years.
But sometimes, the stock moves faster than the business, which can cause trouble. Right now, Palantir's market cap is roughly $250 billion. The company generated $2.87 billion in revenue in 2024. To give some perspective to that, Palantir is now a larger company than some of the world's most prominent businesses, including McDonald's, Cisco, and Adobe:
Yet, as you can see above, Palantir does only a fraction of the revenue. These are all different business models, but all three are highly profitable and have outstanding track records of sustained growth. When you buy Palantir today, you're essentially banking on Palantir to follow suit. Maybe Palantir will keep growing and eventually earn more revenue and profits than all these companies. If so, it's still hard to deny that much of the company's future success is reflected in the stock now.
There's a good chance that the stock is more likely to go down than up from here, at least in the short term. Valuations act like gravity, pulling harder the further they get into the stratosphere. Investors should consider waiting for a pullback to buy the stock, or at the very least, buy slowly to leave some cash handy. Stocks that go up this far, this fast, often pull back hard, too.
Before you buy stock in Palantir Technologies, consider this:
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Jake Lerch has positions in Adobe, McDonald's, and Nvidia and has the following options: long February 2025 $1,020 calls on Netflix and short February 2025 $1,025 calls on Netflix. Justin Pope has positions in McDonald's. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe, Apple, Cisco Systems, Meta Platforms, Microsoft, Netflix, Nvidia, and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Palantir Technologies Surges to $100: Is This Red-Hot AI Stock Still a Buy? 3 Analysts Weigh In. was originally published by The Motley Fool