Is Palantir Stock Ripe for a Rebound?

Palantir Technologies (NASDAQ: PLTR) was among the biggest early winners of the artificial intelligence (AI) boom. Customers rushed to the company for its AI-driven software platform, and this helped supercharge Palantir's revenue growth. Investors rewarded this performance by piling into the stock, and that pushed it to a gain of more than 700% over three years.

But recent times haven't been as easy for Palantir, at least from a stock performance perspective. While earnings growth and demand remain strong, the stock price hasn't followed. Instead, Palantir has fallen, heading for a loss of 26% so far this year.

And this has made Palantir, a stock once considered very expensive, cheaper too. Is the stock ripe for a rebound at today's level? Let's find out.

Image source: Getty Images.

Palantir's path so far

First, we'll consider Palantir's path so far. As mentioned, Palantir is among the first batch of companies that have translated AI expertise into revenue. The company actually has been around for quite some time -- more than 20 years -- and over that time, perfected its software platforms that help customers harness the power of their data. The U.S. government represented the major revenue driver for Palantir in its early days, but in recent times, Palantir's AI platform, launched in 2023, has helped generate big gains in the commercial market.

This product is the Artificial Intelligence Platform (AIP), and it incorporates large language models in its aggregation and analysis of a customer's data, so that the customer can then make better use of the data. For example, a customer may use its conclusions to make strategic decisions or develop new products and services.

And the great news here is that, since the AIP launch, the government and commercial businesses have been delivering significant growth in the double and triple digits. In the latest quarter, total revenue surged 85%, for the company's highest-ever year-over-year growth rate, to more than $1.6 billion. And Palantir's Rule of 40 score of 145% shows it's doing a tremendous job of balancing growth and profitability -- a score of 40% is considered good, and anything above that progressively better.

Importantly, gains in commercial customer count and total deal value, as well as ongoing comments from the company about strong demand, suggest this momentum will continue.

Why has Palantir stock declined?

So, considering all of this, why has Palantir stock declined in recent months? The stock has faced a couple of headwinds. First, since early last year, some investors worried about Palantir's valuation, which peaked at 285x forward earnings estimates in November. By comparison, big tech companies involved in AI, such as Nvidia and Alphabet, at the time traded for less than 45x estimates.

This valuation level clearly made some investors think twice before buying the stock, particularly as certain analysts and investing professionals suggested that an AI bubble could be forming. Then, in the earlier months of this year, investors rotated out of the biggest AI winners and broadened exposure into other industries, such as healthcare and certain consumer-related stocks, as well as companies known for dividend growth. In an environment of uncertainty, with ongoing turmoil in Iran and rising inflation in the U.S., investors opted for stocks associated with a certain level of earnings stability.

All of this has weighed on Palantir stock in recent months. As a result, valuation -- the element that sparked caution in the first place -- has come down. Today, Palantir trades for 89x forward earnings estimates, which is still higher than many big tech stocks. Again, to use Nvidia and Alphabet as a comparison, they're trading for less than 25x estimates.

PLTR PE Ratio (Forward) data by YCharts

So, now that Palantir is cheaper, though still not cheap, could the stock be ripe for a rebound? I think it's possible, particularly if investors regain a general confidence in growth stocks -- this may be on the way if the U.S. and Iran reach a peace agreement. But the best news of all is, even if it takes time for Palantir stock to recover its momentum, the company has what it takes to deliver earnings growth and a win for investors over the long term.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.