Palantir Just Became the 20th Most Valuable Company, But Is It a Buy Now?

Key Points

• Palantir's Artificial Intelligence Platform has delivered vast productivity improvements for its clients.

• Valuation metrics may give prospective investors pause.

• 10 stocks we like better than Palantir Technologies ›

It may come as a surprise to many investors that Palantir Technologies (NASDAQ: PLTR) is now the 20th most valuable company in the world. It has a market cap of around $372 billion, a notable achievement considering it was barely a large-cap stock during the low point of the 2022 bear market.

Nonetheless, investors may struggle with managing Palantir stock amid these gains. Current shareholders may wonder whether the stock has risen too far, while prospective buyers may ponder whether the stock has more room to run. Thus, they need to take a closer look at the company and its financials before deciding how to manage Palantir holdings.

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Where Palantir stands in the marketplace

Palantir has become known as a big-data company that can leverage functions such as artificial intelligence (AI) and machine learning to deliver analytical insights. It started in the national security realm, earning early recognition for helping the U.S. government find Osama bin Laden.

Later, it applied these skills to commercial use, attracting more customers. However, its generative AI-driven Artificial Intelligence Platform (AIP) has revolutionized the company's operations.

Customers began to report huge productivity gains. In one case, AIP helped a company achieve in one day more than what a hyperscaler could do in four months. One insurer also reduced its process for automating underwriting workflows from two days to just three hours.

Seeing such results is bullish for Palantir's value proposition, and the company seems to have a bright future as more companies turn to its productivity tools. One Morningstar analyst believes Palantir's addressable market is between $1.2 trillion and $1.8 trillion.

As investors discovered these benefits, they steadily bid the stock higher, a growth phase that reached a fever pitch after the 2024 presidential election. Consequently, the stock has risen 475% just in the last 12 months.

What the financials say

Unfortunately, the financials seem to indicate more growth potential than results. Over the last 12 months, the company has generated around $3.1 billion in revenue.

That figure indicates tremendous potential in what could be a $1.2 trillion addressable market. Nonetheless, it represents a small fraction of a $372 billion market capitalization, indicating a price-to-sales ratio (P/S) of 126. In comparison, the average P/S for the S&P 500 is 3.25, and even many growth stocks trade at less than 20 times sales.

The earnings results also appear to point to considerable overvaluation. Over the last 12 months, the company reported a net income attributable to common shareholders of $570 million. That leaves investors with a price-to-earnings ratio (P/E) of more than 685. Unfortunately, significant improvements in earnings do not seem to bolster its buy case amid a forward P/E of more than 270.

And even if the improved earnings were to continue, the forward one-year P/E is nearly 215, indicating that the growth would have to persist for several years to justify the current valuation. Thus, even if investors can still win in the long term with this stock, the potential downside that Palantir could face may not justify the risks associated with buying the stock now.

Is Palantir a buy now?

Under current conditions, investors should refrain from purchasing additional shares of Palantir. Its addressable market and growth trajectory indicate that the stock is an eventual winner, even at today's prices.

Still, the elevated valuation poses a significant risk. Currently, the stock could lose three-fourths of its value and still be considered "overvalued" in a technical sense.

And if market sentiment turns negative, investors will likely turn on highly valued stocks such as Palantir, possibly leading to years of paper losses. For these reasons, you should probably wait for a considerable pullback before buying the stock or seek returns in other investments.

Should you invest $1,000 in Palantir Technologies right now?

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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.