Should You Really Ignore Palantir's Steep Valuation and Buy the Stock? Here's What History Says.

Palantir Technologies (NASDAQ: PLTR) has been among the first artificial intelligence (AI) winners. The company offers customers a platform that allows them to immediately apply this hot technology to their needs -- and generate major results. This has helped earnings and the stock price to soar in recent years. For example, over three years, Palantir shares have advanced a mind-boggling 1,200%.

This is fantastic, but along with this top performance has come something that's actually weighed on the stock in recent times. And that's a high valuation. Palantir's stock, trading at 155x trailing 12-month earnings, looks expensive compared to many other tech companies. For example, AI chip giant Nvidia trades for 43x earnings, while software leader Microsoft trades for 24x.

Should you really ignore Palantir's steep valuation and buy the stock? Here's what history says.

Image source: Getty Images.

Palantir's IPO

Before we dive in, let's get to know Palantir a bit better. The company has existed for more than 20 years, but it only launched an initial public offering back in 2020. Though it didn't immediately soar, Palantir stock didn't take too much time to attract the attention of the investment community.

The company, which for years depended on government contracts for growth, in recent years saw its revenue opportunity greatly expand. While the government continued to deliver double-digit revenue gains, the commercial customer suddenly emerged as a powerful contributor. Just a few years ago, Palantir only had a handful of U.S. commercial customers, but that number has grown to 615.

In the latest quarter, U.S. commercial revenue climbed 133% to $595 million, and the company closed U.S. commercial total contract value of more than $1.1 billion. This is as total profitability also rose.

Why is Palantir seeing such growth? Over time, the company has built expertise in data analysis and data-driven decision making -- Palantir's software systems help its customers harness the power of their own data. And in 2023, the company launched its Artificial Intelligence Platform (AIP), which brings the capabilities of large language models into the mix.

AIP, using the power of commercial customers' data, helps them immediately apply AI to their problems -- from managing workflow to making crucial business decisions. The platform delivers results that aren't general but highly specific and perfectly suited to the customer's needs. The result? Customers are saving time and money and, in many cases, becoming more innovative.

Explosive growth for Palantir

And all of this has translated into explosive growth for Palantir, with government and commercial customers turning to AIP. This doesn't seem set to slow down any time soon, as the company continues to speak of soaring demand quarter after quarter. What also should support this is the idea that AIP makes it easy for customers to benefit from AI -- without having to build out AI systems on their own.

As mentioned, the one problem that has put the brakes on Palantir's stock performance is the stock's valuation. Though it's fallen from its peak, it remains high.

PLTR PE Ratio data by YCharts

So, should you really buy a stock that's trading at these levels? Now is a great time to take a look back in time. This involves the valuations of a couple of other technology giants earlier in their stories as publicly traded companies. As you can see in the chart below, Amazon and Apple each traded at sky-high levels in the past, and today they're very reasonably priced.

PLTR PE Ratio data by YCharts

And as you can see in the following close-up view of Apple, once earnings truly took off in a lasting way, valuation came down.

AAPL PE Ratio data by YCharts

This may be what's starting to happen now with Palantir.

PLTR PE Ratio data by YCharts

Palantir's steep valuation

Now, let's get back to our question: Should you really ignore Palantir's steep valuation and buy the stock? History shows us that other tech players in the past went through periods of high valuation -- and if you refused to buy them for that reason, you may have missed out on big gains over time. Here's a look at Apple, for example. This represents a 70,000% gain in stock price over the past 25 years.

AAPL PE Ratio data by YCharts

Of course, this doesn't guarantee that Palantir will deliver the same gain over time. But history does tell us that high valuations often occur early in a tech growth story -- and if the company's business continues to successfully grow, valuation often stabilizes at more reasonable levels.

Regarding Palantir today, it's key to consider your investment strategy. Though there's reason to be optimistic about this company, if you're a value investor or a cautious investor, Palantir probably isn't the right choice for you right now. But if you're an aggressive investor and valuation was the one thing that kept you from adding shares of Palantir to your portfolio, you might reconsider. If history is right, you still may greatly benefit over the long term by getting in on Palantir even at this steep valuation.

Adria Cimino has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Apple, Microsoft, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.