Palantir Is One of the S&P 500's Hottest Stocks, but Is the Momentum Sustainable?

Palantir Technologies (NASDAQ: PLTR), which joined the S&P 500 last October, was one of the index's hottest stocks this year. It rallied more than 150% year to date, as the S&P 500 advanced 15%. It's also risen more than 19 times from its earliest trading price of $10 in September 2020.

The data mining and analytics company dazzled the market with its accelerating revenue growth, soaring profits, and multibillion-dollar contracts. But can it maintain that feverish momentum? Let's review its business model, growth rates, and valuations to decide.

Image source: Getty Images.

How does Palantir make money?

Palantir operates two platforms: Gotham for its government customers, and Foundry for its commercial customers. Both platforms collect data from disparate sources, organizes that information across visual dashboards, and analyzes it to spot trends. In its latest quarter, 54% of its revenue came from Gotham, and 46% came from Foundry.

Most U.S. government agencies were already using Gotham when Palantir went public. That's why it declared it would become the "default operating system for data across the U.S. government" in its S-1 filing. Gotham was frequently used to plan military and law enforcement missions, and Palantir wanted to leverage that battle-hardened reputation to expand Foundry's commercial reach among larger enterprise customers.

When Palantir went public, it claimed it could grow its revenue by at least 30% annually through 2025. It surpassed that ambitious target in 2020 and 2021, but its growth cooled off in 2022 and 2023 as it grappled with uneven government spending and macro headwinds for its commercial customers.

Data source: Palantir. YOY = Year-over-year.

That slowdown seemingly indicated that Palantir's high-growth days were over, and its stock price sank to a record low of $6 in December 2022. Rising interest rates exacerbated that pressure by compressing its valuations and driving investors toward more conservative investments.

Why did the bulls rush to Palantir?

But in 2024 and 2025, Palantir's revenue growth accelerated again. The geopolitical conflicts in Ukraine and the Middle East generated strong tailwinds for its government business. Declining interest rates and the artificial intelligence (AI) race also drove more companies to ramp up their spending on Palantir's commercial services to collect and crunch more data.

Like many cloud-based software companies, Palantir uses the Rule of 40 (its revenue growth rate added to its adjusted operating margin) as a baseline for its success. If that sum stays above 40, it's likely expanding at a sustainable rate without crushing its own margins. That key metric reached 114% (63% revenue growth, plus an adjusted operating margin of 51%) in the third quarter of 2025, compared to its score of 94% in the second quarter.

Palantir also streamlined its spending and reined in its stock-based compensation expenses to turn profitable on a generally accepted accounting principles (GAAP) basis in 2023. Its GAAP net income more than doubled year over year, both in 2024 and the first nine months of 2025. Those soaring GAAP profits led to its inclusion in the S&P 500 and Nasdaq-100 indexes, which attracted a stampede of bulls and propelled its stock to fresh all-time highs.

For the full year, it expects its revenue to rise 53%-54% to about $4.4 billion, with an adjusted operating margin of 49%. Analysts expect its GAAP EPS to more than triple. That growth should be driven by the rapid expansion of its U.S. commercial business, a new $10 billion contract with the U.S. Department of Defense, its plans for building a "Golden Dome" missile defense system for the U.S. alongside Anduril Industries and Microsoft, and its ongoing expansion into Europe and other overseas markets.

Is that momentum sustainable?

From 2024 to 2027, analysts expect Palantir's revenue and GAAP EPS to grow at a CAGR of 41% and 37%, respectively. We should take those estimates with a grain of salt, but it could have plenty of room to expand as its government and commercial customers accumulate more data for their latest cloud and AI applications.

But at $193 per share and a market cap of $491.5 billion, Palantir trades at more than 300 times next year's earnings and 83 times next year's sales. Those meme stock valuations, likely inflated by the ongoing buying frenzy in AI stocks, look dangerously unsustainable.

Palantir runs a tight ship, but investors shouldn't pay the wrong price for the right company. It had an incredible run over the past year, but I think it's smarter to take some money off the table at these levels in case it runs out of steam.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.