Palantir Is Executing Perfectly. History Says It Won't Be Enough.

Here's a question that should matter to every investor in Palantir Technologies (NASDAQ: PLTR): Of all the S&P 500 companies that have ever traded at a valuation close to Palantir's, how many actually made investors money?

The answer: extremely few.

Palantir's stock is a member of a very small club

The data analytics and artificial intelligence (AI) company is currently trading around $155 a share and has a market capitalization of $370 billion. The company brought in $4.5 billion in revenue last year, which means shares carry a price-to-sales ratio (P/S) of 87. That makes it the most expensive stock in the S&P 500.

And not just today. Few companies that have ever been included in the index have carried a P/S like that. In fact, according to financial research firm WisdomTree, only 231 have ever reached a P/S of 25. The only S&P 500 companies to reach a P/S of 100 -- and Palantir has -- came during the irrational exuberance of the dot-com bubble.

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What history says about high P/S companies

The WisdomTree report also said that, of the 231 companies that have reached 25 times sales, just 21% outperformed the market over the following year. Not crush it -- just beat it. The median relative return was a huge loss of 36%. And that gets worse the further you extend the time frame. Over three years, 9% came out ahead. Over 20 years, just 4%.

And if you make the club more exclusive, things look even more bleak. Just 148 companies reached a P/S of 40. And only a few of them outperformed the market over the long haul: 3% over 20 years.

And the truth is that many of the companies that lost at these valuations weren't bad businesses. A lot of them were growing revenue and earnings rapidly. They just couldn't live up to the expectations investors had placed on them. The bar for a company with a P/S of 40 is incredibly high. The bar for a P/S above 80 is in the stratosphere.

Palantir could double its revenue tomorrow and still be one of the most expensive stocks

Yet Palantir is clearing that bar right now, and that is genuinely impressive. I am not arguing this point at all. The company is executing at a level that very few can match. The question is: For how long?

I think that, as well as its executing, it could face some real issues scaling up in the not-so-distant future. For as much as it has differentiated itself, I'm not convinced it can continue to remain "one of a kind" while the Microsofts of the world pour billions into enterprise AI.

Palantir's strongest moat is within the federal government, but it needs its enterprise business to grow to the kind of revenue figures that would justify its valuation. If the competition really heats up -- and I think it will -- management may find its ability to grow at 50%-plus a year impossible to maintain.

The fact is that if Palantir's stock dropped 50% tomorrow, it would still be among the 150 most expensive companies in S&P 500 history. That's how much perfection is already priced in.

Johnny Rice 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.