Palantir Stock Has Made Its Early Investors Rich. Can It Do It Again?

Palantir Technologies (NASDAQ: PLTR) stock hasn't merely performed well since the company's public offering back in September 2020. It has been downright heroic. Shares of this artificial intelligence (AI)-powered decision-intelligence software platform are up nearly 1,700% from that point, making it one of the best-performing tickers for this time frame.

As the old adage goes, though, past performance is no guarantee of future results. Can this name come anywhere close to repeating such a performance over the course of the next five years?

Probably not.

Expensive by any standard

Don't misunderstand. Palantir is hardly doomed.

Indeed, the company's now well out of the red and increasingly in the black. Last year's per-share profits of $0.63 are projected to triple by 2027, and then grow another 40% the year after that, now that it has achieved much-needed scale. Last year, its top line rose an impressive 56% to $4.4 billion, and it's expected to top $10 billion the year after next.

Taking a wider view, Precedence Research expects the decision intelligence software market in which Palantir operates to grow by more than 15% per year through 2035. That's a fantastic tailwind.

There's a significant challenge ahead for the stock, however. That's its valuation... current and projected. Palantir's trailing-12-month price-to-earnings ratio is a steep 180, versus the S&P 500's (SNPINDEX: ^GSPC) trailing P/E of less than 25. Even if the company ends up reporting the $2.56 per share expected for 2028, shares of this software giant are still priced more than 50 times that amount. This doesn't leave the stock much room for a great deal of upside anytime soon.

Nothing lasts forever

It can be true that valuations matter less when a growth story is as fantastic as this company's has been. It's generally not true indefinitely, however. Eventually, the euphoria wears off. The willingness to pay an outrageously steep valuation follows suit. Sooner or later, investors expect a company in a maturing business to justify its stock's price relative to other companies' stocks.

Image source: Getty Images.

Then there's the other stumbling block that few are considering. That's competition.

Palantir Technologies may be the market leader of the decision-intelligence space right now. There's no real barrier to entry into the market, though, particularly for companies like Microsoft or Alphabet that already have many of the technical resources they would need to fully penetrate this relatively young industry.

Indeed, to the extent quantum computing will integrate into the decision-intelligence industry's technological platforms, Alphabet and even Microsoft are already well-positioned to penetrate this market. And if it's not one or both of those companies, with this large an opportunity on the table, you can bet someone's going to successfully compete with Palantir for it.

Whichever company that turns out to be, competition reduces pricing power, which puts pressure on profit margins... pressure that Palantir hasn't faced yet.

Just keep it in perspective

Again, though, don't read too much into my doubts that Palantir shares will come anywhere close to again dishing out the sort of gains they did right out of the gate. Even a less potent Palantir Technologies is still a more potent growth stock than plenty of other options. You'll just want to keep your expectations in check for the next chapter of this outfit's evolution.

James Brumley has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Microsoft, and Palantir Technologies. The Motley Fool has a disclosure policy.