Can This Artificial Intelligence (AI) Stock Justify Its Valuation?

Perhaps no company has more successfully leveraged generative artificial intelligence (AI) than Palantir (NASDAQ: PLTR), which released its Artificial Intelligence Platform (AIP) in 2023. Once they experienced the platform in Palantir's boot camps, clients from a variety of industries walked away with eye-popping productivity gains.

Moreover, Palantir stock investors benefited from the massive rise in the stock price. Since its low in December 2022, the stock is up nearly 2,700%, exceeding the 1,200% gain in Nvidia over the same time frame. That led to growth in its valuation metrics, meaning the question now is whether Palantir can still justify its multiples.

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Palantir and its valuation

Unfortunately for investors on the sidelines, Palantir comes with a massive premium no matter how you perceive the stock. Investors who might otherwise dismiss concerns about the 388 price-to-earnings (P/E) ratio may balk when they learn the forward P/E ratio of 164.

Furthermore, the price-to-sales (P/S) ratio of 108 and the price-to-book ratio of 60 are unlikely to bring comfort. With these possible "bubble" valuations, some investors may dismiss the stock, even after seeing the gains of the last three years.

However, growth investors may pay the premium if they believe the company's rate of expansion can justify it, and indeed, the growth is notable.

In the third quarter of 2025, its revenue of almost $1.2 billion grew by 63% year over year, including a 77% rise in U.S. revenue. Considering the 48% yearly increase in Q2 2025 and 39% annual rise in Q1 2025, revenue growth is in an uptrend.

Additionally, profit growth is on fire. In Q3, the net income attributable to shareholders of $476 million was far above the $144 million profit in the year-ago quarter.

Still, skeptics are probably right to ask whether Palantir can sustain its revenue growth trend. Analysts forecast a 54% revenue increase for 2025, and they expect that to fall to 42% in 2026.

Despite that predicted slowdown, Palantir should continue to deliver rapid growth. Unfortunately, investors cannot predict whether the continued increases will lead to the stock moving higher or whether investors will see the valuation and punish the stock for the growth slowdown.

Can Palantir justify its valuation?

Ultimately, only time will tell whether Palantir will justify this valuation. Nonetheless, with the likelihood that the stock will fall amid slowing revenue growth, investors should probably not buy more shares under current conditions.

Admittedly, the productivity gains from AIP could continue to bring sustained revenue and profit growth for years to come. Still, valuations indicate its stock price is far ahead of the company's current or anticipated growth. With the current valuations pricing Palantir for perfection, the stock is more likely to fall than rise.

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