Investors Are Rotating Out of Tech. Here's Why That's Great News for This Artificial Intelligence (AI) Growth Stock.

The first quarter of 2026 wasn't a good one for technology investors. The Middle East conflict led investors to press the panic button, prompting them to book profits in technology stocks that have appreciated strongly in recent years amid the growing adoption of artificial intelligence (AI).

While it is understandable that investors have been rotating out of tech stocks to preserve capital in uncertain times, the pullback in this sector has also opened up buying opportunities. Some AI stocks that were overvalued earlier can now be bought at relatively lower valuations.

Palantir Technologies (NASDAQ: PLTR) is one such stock that has retreated by almost 18% so far in 2026. Let's see why the sell-off in Palantir is actually good news for the stock.

Image source: The Motley Fool.

Palantir's valuation is coming down even though its earnings are rocketing higher

It cannot be denied that Palantir stock was due for a correction following a red-hot rally that it has been enjoying since 2023. The stock had gotten ahead of itself. However, weakness in Palantir's shares in recent months has brought its price-to-earnings ratio down, while earnings continue to grow at a breathtaking pace.

PLTR EPS Diluted (Quarterly) data by YCharts

Of course, Palantir can't be called a cheap stock just yet, given its trailing earnings multiple of 232 and forward earnings multiple of 113. Even the sales multiple of 84 is significantly higher than the U.S. technology sector's average sales multiple of 8.8. However, looking at Palantir's valuation in isolation won't be correct.

The company's Rule of 40 score justifies its premium valuation. The Rule of 40 is a metric used in the software-as-a-service (SaaS) space, and it's calculated by adding a company's revenue growth rate to a profitability metric, or its free cash flow. A reading of more than 40 is considered to be ideal.

Palantir calculates its Rule of 40 by adding the revenue growth rate to its adjusted operating margin. The metric stood at 127% in the fourth quarter of 2025, up from 81% in the year-ago period. The company noted in its Q4 2025 investor presentation that its Rule of 40 score is the highest in the enterprise software space.

The healthy growth in this metric can be attributed to Palantir's fast-growing revenue and improving margin profile. The company's AI software platform has gained impressive traction due to its ability to deliver significant productivity gains. Palantir has been quickly adding customers, and importantly, its customers have been known to expand their use of its solutions after initial deployment.

On its February earnings call, Palantir management pointed out:

Existing customers are expanding faster and larger. For example, a utility company expanded from $7 million ACV in Q1 2025 to $31 million ACV by year-end, while an energy company expanded from $4 million ACV in Q1 2025 to over $20 million ACV by year-end, driven by value generated from new use cases. In addition, new customers are starting with substantial initial deals.

ACV refers to the annual contract value, according to Palantir. The impressive growth in this metric suggests the company is building a sticky customer base that should power its long-term growth.

Should investors buy it following its pullback?

The robust growth in Palantir's customer base and incremental spending by existing customers explain why its earnings will continue to grow at a strong pace from last year's level of $0.75 per share.

PLTR EPS Estimates for Current Fiscal Year data by YCharts

Also, the AI software platforms market that the company serves is anticipated to grow at a 40% annual rate through 2030. Palantir is growing faster than that, with its revenue rising 56% last year. So, growth-oriented investors can consider initiating a position in this AI stock following its recent pullback.

Its 12-month median price target of $200 suggests a potential 37% jump in the coming year, and it won't be surprising to see it deliver much bigger gains in the long run due to the solid growth of the AI software space.

Harsh Chauhan 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.