Palantir Trades at 64X Sales. Here's Whether That Premium Is Justified.

Palantir Technologies (NASDAQ: PLTR) is one of the few companies that has consistently delivered breathtaking results, living up to all the hype around artificial intelligence (AI). Yet many investors who bought Palantir stock near its highs last year have lost money. It's another reminder that the price investors pay for a stock matters.

Fast-forward to today, when Palantir trades at 64 times its trailing-12-month sales. That's still a significant premium over most stocks on Wall Street. Although the stock burned investors last year, I believe Palantir's exceptional business justifies its current premium. That said, investors who buy Palantir stock will want to be careful how they do it.

Image source: The Motley Fool.

First, it's crucial to understand why Palantir's valuation is so high

I like to think of the AI models developed by OpenAI or Anthropic as similar to humankind's discovery of fire. People needed to control and refine it before it could really change the world. Palantir's software technology does just that with these AI models, enabling government and corporations to safely and securely wield AI for various tasks and applications.

Palantir launched its AIP (Artificial Intelligence Platform) in mid-2023, and the company has grown profitably faster and faster ever since.

PLTR Revenue (TTM) data by YCharts

The most exciting aspect of Palantir might be just how high its ceiling could be. It recently expanded its partnership with Nvidia to provide the government and other sovereign customers access to Nvidia's open-source AI models running on Palantir's application technology layer. The company also still only has 832 commercial customers, so Palantir is barely scratching the surface of its addressable market. There are over 20,000 large companies in the United States alone.

Palantir won't grow at over 80% forever, but there might be many years of strong growth ahead.

The risks of paying the Palantir premium

With a jaw-dropping Rule of 40 score of 145% in the first quarter, Palantir's sales growth and cash flow margins are among the best of any company on Wall Street. When you combine that with Palantir's explosive top-line growth, it becomes apparent why the stock has traded at such high valuations.

But even the best companies shouldn't command a blank check. Buying Palantir last year at over 120 times sales hasn't worked out very well for many investors so far. Shares look far more attractive now at 64 times sales.

Still, the stock could easily slide further from here. What if Palantir's growth slows or even levels off? The market's perception could change in an instant, and the stock's premium suddenly evaporates.

The best plan for investing in Palantir is to do it slowly. Consider dollar-cost averaging to help mitigate the stock's volatility. Hold it for the long term, letting the business grow into its lofty valuation. That will dramatically increase your odds of success.

Justin Pope 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.