Here's How Much Palantir Needs to Grow to Justify Its Current Valuation. You Might Be Surprised.

Palantir Technologies (NASDAQ: PLTR) is, without question, one of the biggest success stories in recent years. The artificial intelligence (AI) software provider's shares have skyrocketed more than 25x over the last three years. Palantir's stock is up more than 130% over the last 12 months.

However, Wall Street is only moderately bullish about this high-flying AI leader. The consensus 12-month price target reflects a potential upside of around 11%. That's not bad, but it's a far cry from the gains that Palantir has been delivering.

Why aren't analysts more excited about Palantir? Its valuation. The stock's forward price-to-earnings ratio is a whopping 172.4. Palantir trades at nearly 112 times trailing 12-month sales.

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Much ado about nothing?

Not everyone is concerned about Palantir's valuation, though. Many investors – particularly retail investors – continue to buy the stock hand over fist. They wouldn't be buying if they didn't think the stock would keep rising.

Palantir founder and CEO Alex Karp isn't worried about valuation, either. He wrote to shareholders in November 2025, "It has indeed been difficult for outsiders to appraise our business, either its significance in shaping our current geopolitics or its value in the vulgar, financial sense."

Karp said that Palantir has succeeded by delivering "authentic and substantive growth." He argued that the company's "ascent has confounded most financial analysts and the chattering class, whose frames of reference did not quite anticipate a company of this size and scale growing at such a ferocious and unrelenting rate."

Whether you fully agree with Karp or not, he's 100% correct that Palantir's growth has enabled its stock to defy gravity. Many investors seem to believe that this growth addresses any objections about Palantir's valuation. But are those investors right?

Estimating the growth required to justify Palantir's valuation

Palantir's past growth, as impressive as it may be, doesn't amount to a hill of beans when it comes to determining whether the stock is valued appropriately. What matters is how much the company will grow in the future.

How much does Palantir need to growth to justify its current valuation? There isn't a hard-and-fast number, but we can estimate a ballpark range.

Perhaps the best approach for this estimation is a reverse discounted cash flow (DCF) analysis. If we assume a 10% discount rate that investors would likely demand for the risk of investing in a high-growth tech stock, Palantir would need to increase its revenue by a compound annual growth rate (CAGR) of around 40% over the next 10 years to justify its current market cap of roughly $400 billion.

We could also assume that Palantir's target price-to-sales (P/S) ratio in the future is 10x (a premium to the current average P/S multiple of 7.4 for application software companies). To move from its current P/S ratio of 112 to the target ratio of 10, Palantir would need to grow its revenue by a CAGR of 30% over the next 8.5 years or so. It would need to grow revenue by a CAGR of 40% over the next 6.5 years.

Based on these analyses, Palantir would likely need to grow revenue by 30% to 40% annually over much of the next 10 years to justify its current valuation. That should be easy for a company that grew revenue by 63% year over year in its latest quarter, right?

Palantir's challenges

Unfortunately, past performance doesn't necessarily translate to future performance. Palantir faces two key challenges with those growth projections.

First, even a slight variation in the assumptions used could significantly increase the growth the company needs to deliver to justify its current valuation. Second, few companies have grown their revenue at a CAGR of 30% to 40% over the long term.

Perhaps Palantir will be an exception. However, it's fair to say that nearly everything must go right for the company. That rarely happens.

Keith Speights 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.