The Costly Mistake Investors Are Making With Palantir Technologies Stock

Shares of data analytics company Palantir Technologies (NASDAQ: PLTR) have been falling sharply this year. They're down around 22%, even as the S&P 500 has been doing fairly well, rising an impressive 8% thus far. What may be even more perplexing to Palantir shareholders is that this comes even with the company posting some solid earnings numbers recently.

But there are more factors to consider beyond just whether the business is growing that can impact the stock's performance. The big mistake I see investors making is in assuming that because the business is doing well, the stock should be rising. However, Palantir's valuation has long been disconnected from its underlying fundamentals, and here's why that can be both a blessing and a curse for this tech stock.

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Palantir's stock performance hinges more on sentiment than earnings

The challenge with predicting where Palantir's stock will go is that its price movements in recent years haven't seemed tied to valuation. And that disconnect has led to tremendous gains for investors. At virtually any multiple, it's an extremely expensive buy. It trades at 150 times earnings, around 70 times revenue, and roughly 40 times its book value.

With multiples like that, it's clear that Palantir trades on hype and relies more on investor sentiment than its underlying earnings numbers. That's why even with the company releasing a strong earnings report earlier this month, with its growth rate accelerating to an impressive rate of 85%, it wasn't enough to give it a boost. Investor sentiment doesn't appear strong right now, as concerns about its high valuation may finally be seeping into the stock's price movements.

Palantir's stock price decline is by no means an indication that the business is doing poorly. The company is performing incredibly well, but with some mammoth gains in recent years, its stock may simply have gotten too expensive.

The stock remains a risky buy

Although shares of Palantir are down big this year, a correction has been long overdue. Last year, the stock rose by 135% after already soaring 341% in 2024 and by 167% in 2023. Its gains have been massive, widely outpacing the broader market, due to strong investor sentiment. But as solid a growth stock as it may be, that doesn't mean it'll end up rising forever. At some point, there will be an inevitable pullback, and that point looks to have finally arrived.

The big question around Palantir is whether the stock will continue to fall or whether it's due for a bounce back. That's difficult to predict, but as long as its valuation remains disconnected from its fundamentals, I'd steer clear of it because it can be a volatile investment to hang on to.

David Jagielski, CPA 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.