1 Jaw-Dropping Stat Palantir Investors Must Know

Key Points

• Palantir's artificial intelligence (AI) software has been popular for decades.

• The company's U.S. commercial revenue growth rate is impressive.

• The stock carries a hefty price tag.

• 10 stocks we like better than Palantir Technologies ›

Palantir's (NASDAQ: PLTR) stock has defied logic since its bull run began in 2024. The stock is up a mind-boggling 700% since the start of 2024, making anyone who invested in Palantir's stock and held on quite satisfied.

While that's an impressive statistic, it's not the one I think investors should focus on. This statistic could make or break the Palantir investment thesis, and both potential Palantir buyers and current shareholders must be aware of its significance.

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Palantir's revenue growth has been excellent except in one area

Palantir is another company that's heavily investing in the artificial intelligence (AI) arms race. While most companies only started launching products in recent years, Palantir and its AI-powered data analytics platform have been doing it since the early 2000s, giving the company a leg up.

Originally, its software was intended for government use and reportedly helped take down Osama bin Laden; it has also been used for other tasks, such as optimizing vaccine distribution during the COVID-19 pandemic. Eventually, management decided that there was a potential use case for Palantir's platform on the commercial side, and they were correct.

Although government revenue still makes up the majority of Palantir's financial picture, commercial revenue also plays a big part. In Q1, the commercial side generated $397 million (up 33% year over year) versus the government sector's $487 million (up 45% year over year). Considering how mature the government side of its business is, it may come as a surprise that it outperformed the commercial side; however, this is primarily due to poor international performance on the commercial side.

Outside the U.S. and China, the world has been fairly slow to adopt AI. For example, Palantir's U.S. commercial revenue increased 71% to $255 million in Q1. That's a significant mismatch from the overall commercial growth rate, especially when considering that U.S. revenue accounted for approximately two-thirds of total commercial revenue. If the rest of the world (specifically Europe) starts to adopt AI, Palantir's growth rate could accelerate to an even faster rate, which could send the stock rocketing higher.

However, this isn't the key metric I think investors should be focusing on. Instead, investors need to examine Palantir's valuation and determine what assumptions are already reflected in the stock price.

Palantir's valuation has gotten out of hand

In Q1, Palantir's overall revenue rose 39% year over year. However, the stock has increased by over 700% since the start of 2024. Those two numbers are completely mismatched and suggest that Palantir's soaring valuation is more a result of its rising stock price than its actual business performance. When a stock becomes uncoupled from the business, that's a problem, and it could lead to issues with Palantir's stock moving forward.

Currently, Palantir's stock trades at a jaw-dropping 112 times sales.

PLTR PS Ratio data by YCharts

Most software companies trade at a multiple of 10 to 20 times sales, so Palantir is significantly outside this range. Furthermore, this isn't the first time stock investors have seen a company trade for more than 100 times sales. However, most stocks that achieved that valuation were doubling or tripling the revenue year over year, and Palantir isn't anywhere close to that.

I'd challenge investors to find a stock that has traded for more than 100 times sales (that didn't go public with little to no revenue) that has worked out for investors over the long term; I can't find any. Palantir has found itself in a problematic spot, and the only way forward is to grow its way into a higher valuation or suffer a painful stock price correction.

For Palantir's stock to reach a more reasonable (but still very expensive 20 times sales), it would need to grow its revenue by more than 550%. At today's current 39% growth rate, that would take over five years of growth with the stock price staying flat.

That would lead to disappointing returns for investors, so I think investors must be aware of the extreme valuation of Palantir's stock and take action. If you've ridden Palantir up, it's not a bad idea to sell some (or all) of your shares. If you're a prospective Palantir shareholder, I'd suggest steering clear, as there is just too much hype built into Palantir's stock for it to deliver solid long-term returns.

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Keithen Drury 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.