Should You Buy Palantir Stock on the Dip?

Shares of Palantir Technologies (NASDAQ: PLTR) got a brief post-earnings bounce after reporting stellar fourth-quarter results, but it didn't last long.

Palantir is down about 33% from its 52-week high and still trades at a high sales multiple of 74. Let's dive into the fundamentals to see if this top artificial intelligence (AI) stock is worth buying on the dip.

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Palantir's competitive edge

Software stocks are taking a beating to start the year, as investors scrutinize which ones are built to deliver steady long-term growth in the competitive AI market. Palantir is differentiating its offering by delivering real results to customers by leveraging the most advanced AI models.

As a result, organizations are proactively reaching out to Palantir and signing larger initial deals, which continues to fuel accelerating growth. Palantir's U.S. commercial revenue grew 137% year over year last quarter, reaching $507 million.

Companies are quickly scaling their use of Palantir once they see the returns on investment. This drove Lear to promptly scale from 100 users and four use cases to 16,000 users and 280 use cases on Palantir's platform. Palantir said it is seeing this kind of adoption across its customer base. Average revenue from its top 20 customers grew 45% year over year to $94 million per customer.

Perhaps the most important sign of Palantir's widening competitive moat is the number of custom apps that are being built on the platform. Palantir disclosed that customers are now generating more than 1 billion requests per week via its application programming interface (API). The more apps that are built on Palantir, the stickier and more valuable its platform becomes.

How much growth is priced in?

The stock's lofty valuation is a near-term risk investors can't overlook. Its trailing price-to-sales ratio peaked at 137 last year and now stands at 75, which is still very expensive. As the sales multiple compresses, the stock could still fall further despite continued business growth.

No company has ever sustained such a high valuation over the long term. Even though analysts are modeling Palantir's revenue to grow at a compound annual rate of 47% through 2028, investors should expect the stock to return less than that on an annualized basis.

What that means is that the stock could still deliver a market-beating return over the next 10 years, but it may be more modest than the skyrocketing returns seen over the last few years.

If you're looking to invest in Palantir, you could wait and see if it gets cheaper. But buying a stock at the bottom is not easy. Palantir also looked "expensive" at the previous market bottom in 2022. Usually, if I really like a company but find its stock valuation expensive, I'll take a small position and build it over time. Investors need to allow for the possibility that the stock may need to settle into a lower valuation before it can take off again. Palantir has the competitive edge to sustain growth, but patience is key.

John Ballard has positions in Palantir Technologies. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.