Should You Invest $10,000 In Palantir Right Now?

Key Points

• Palantir's software is seeing widespread adoption in the government and commercial sectors.

• Palantir's revenue growth rate continues to accelerate.

• The stock trades at a massive premium to its peers.

• 10 stocks we like better than Palantir Technologies ›

Palantir Technologies (NASDAQ: PLTR) has been a genius investment this year. The stock is up over 140%, placing it in the top five best-performing stocks in the S&P 500.

However, with a run like that, many investors may be questioning whether right now is a good time to invest in Palantir. I think there's one primary reason that makes it clear what investors should do, and it's only a matter of time before Palantir's stock makes a sizable move as a result.

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Image source: Palantir.

Palantir's growth rate shows no signs of slowing down

Palantir's software is centered around artificial intelligence-powered data analytics. Originally, this software was intended for government use, and this is still a massive chunk of Palantir's business today. However, it expanded onto the commercial side and is seeing widespread adoption in this area as well.

One of Palantir's biggest growth drivers is its AIP product. AIP allows users to automate workflows through AI agents and also incorporates generative AI into its existing products.

This software package resulted in rapid growth for Palantir. In Q2, Palantir's revenue rose 48% year over year -- an acceleration from previous growth rates.

PLTR Revenue (Quarterly YoY Growth) data by YCharts

The most promising segment is Palantir's U.S. commercial, which experienced 93% year-over-year growth to $306 million with only 485 customers. That's a small customer base, so it seems like Palantir has a ton of room to expand. However, Palantir's software isn't for everyone, as the average annual cost of this software for this cohort is $2.52 million.

There aren't a ton of businesses that can spend $2.5 million a year on a software package, so this limits the potential client base. Still, there are plenty of companies that can adopt Palatinir's technology, and this should lead to further growth.

But will it be enough to justify its valuation?

Palantir's growth rate doesn't justify its valuation

From the start of 2023 until now, Palantir's revenue has risen by 81%. However, the stock has risen by 2,740%. That's a gross mismatch between stock and business performance, and points toward Palantir's valuation drastically rising as the primary factor in its stock performance.

With the stock trading at 134 times sales and 284 times forward earnings, this thesis is confirmed.

PLTR PE Ratio (Forward) data by YCharts

Few stocks ever reach those valuation levels, let alone a company that isn't doubling or tripling its revenue each quarter.

For example, Nvidia posted several quarters in a row where its revenue more than tripled. Even now, it's growing at a quicker pace (its revenue rose 56% year over year in Q2). However, the stock never traded for more than 50 times sales or 50 times forward earnings, yet Palantir's valuation is currently far higher than that.

This points toward the stock being in a bubble, as Palantir will need to post several years of incredible growth before today's price makes any sense. I predict one of two things will happen with the stock. First, sometime over the next few years, Palantir's bubble will pop, and the stock will come crashing down. I'm not sure when that will happen, but with a valuation like that, it's impossible to live up to expectations. Second, Palantir's stock may not have a dramatic fall, but the stock may post underperforming results as it struggles to live up to high expectations.

Either way, I don't think Palantir is a great place to invest right now. The stock may continue going up, but that's because hype rather than actual business results drives it. Palantir's business is still doing phenomenally, but I want no part in the stock because it's far too richly valued.

Should you invest $1,000 in Palantir Technologies right now?

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Keithen Drury has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.