Palantir (PLTR 0.87%) has emerged as one of the top artificial intelligence (AI) stocks on the market.
The cloud software company offers data analytics platforms that help governments and businesses connect data points they might not otherwise be able to.
The company was founded in 2003 in the aftermath of 9/11 and initially gained traction among intelligence agencies. After establishing itself within the federal government, the company has recently gained significant traction among commercial customers as well, and investors have taken notice.
The stock is up more than 140% year to date as the business has turned profitable, gained admission into the S&P 500, rapidly expanded its margins, and accelerated its revenue growth.
In the AI era, Palantir is quickly emerging as a leader, and management now expects U.S. commercial revenue to jump at least 47% this year. However, Wall Street is souring on the stock as Palantir shares have gotten pricey.
Image source: Getty Images.
Is Palantir too expensive?
Palantir trades at a price-to-sales ratio of 40 as of this writing, and as you can see below, its P/S ratio has risen nearly in lockstep with the stock price over the last year.
Data by YCharts.
In other words, Palantir’s gains have been due primarily to multiple expansion — the stock getting more expensive — rather than growth for the underlying business. Multiple expansion is typically driven by rising investor expectations, and that’s fair as Palantir has turned profitable on a generally accepted accounting principles (GAAP) basis.
However, Wall Street seems to be taking notice of this explosion in the company’s valuation as analysts are no longer as bullish on the stock.
According to Tipranks, the Street expects Palantir to fall 33% in the near-term with an average price target of $27.85. Four analysts rate the stock a buy, seven call it a hold, and another six say it’s a sell.
The street-high price target is also just $50 from Bank of America. Wall Street price targets often lag behind soaring stocks, but it’s still telling that analysts expect the stock to fall over the next year. By contrast, Wall Street still expects Nvidia, which has also soared this year, to continue its rise.
Should you sell Palantir stock?
Palantir is certainly expensive at a P/S ratio of 40, and the last time tech stocks saw their valuations balloon to such levels during the height of the pandemic, the resulting bear market was painful.
Some investors believe the market is already in an AI bubble driven by overinvestment in AI hardware as big tech companies like Microsoft and Alphabet pour billions into data centers in order to win the AI race and unlock the potential of artificial general intelligence.
The growth of Palantir seems to be evidence that there is growing demand for AI platforms, not just hardware, but the company’s revenue growth is slower than you might think given its valuation. In the second quarter, revenue rose 27% year over year to $678 million. U.S. commercial revenue stood out with 55% growth, and U.S. government revenue was up 24%.
Palantir is also ramping up its adjusted profits quickly, and its expanding margins mean the business could be cheaper than it looks based solely on its price-to-sales ratio.
Selling the stock for valuation reasons is always a tough call. It’s impossible to predict when the valuation could become a problem (if ever) with the most common catalysts being a weak quarter or bearish macroeconomic news.
The company is hitting its stride though, and in light of its recent results, selling the stock seems like a mistake given its upside potential. At the same time, shareholders should understand that when expectations are this high, the slightest hint of a slowdown for the company or AI spending overall could be enough to trigger a sell-off.
Regardless, Palantir has been one of the biggest surprises this year. The company will report its third-quarter results on Nov. 4 after the market close.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Bank of America. The Motley Fool has positions in and recommends Alphabet, Bank of America, Microsoft, 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.