What's Wrong With Palantir Technologies Stock?

In the past few years, Palantir Technologies (NASDAQ: PLTR) has been among the hottest tech stocks to own. The rise in generative artificial intelligence (AI) opened up many exciting growth opportunities for the business, with its AI platform being a big hit with government and enterprise customers. The company's CEO, Alex Karp, has often boasted of its success and impressive Rule of 40 score, which, up until recently, has enabled the stock to surge in value despite trading at a sky-high premium.

This year, however, the stock is down 35%, as it's on track for its worst year since 2022, when it declined by 65%, back when the tech sector as a whole struggled due to rising inflation. What is behind the sell-off this year, and can Palantir bounce back?

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Has Palantir simply fallen out of favor with retail investors?

Retail investors can play a big role in how a stock performs, particularly when its price is far above what may be warranted based on fundamentals, as is the case with Palantir. Now, however, with memory stock Micron Technology stealing the spotlight with its tremendous gains due to rising memory prices and Space Exploration Technologies (also known as SpaceX) recently going public, Palantir may simply not be as exciting a growth stock to own anymore; investors have more alluring options to consider.

For its part, Palantir's numbers still look good, and the business has continued to do well. In its most recent quarter, which covered the first three months of the year, the company's revenue rose by an impressive rate of 85%, totaling $1.6 billion. Its adjusted earnings also climbed by 61%. The company's results haven't been bad at all, but investors may simply not be as enamored with Palantir of late. And there is still the nagging issue about valuation, which may also be giving investors second thoughts about the stock.

The stock may be struggling, but it remains incredibly expensive

Although Palantir's stock has been in a tailspin this year, its price still isn't low enough to make it a cheap buy. It still trades at around 130 times its trailing earnings. And even based on its estimated future profits (according to analyst estimates), its forward price-to-earnings multiple remains steep at around 80.

Palantir may not be as egregiously overpriced as it was last year, but the stock continues to trade at a far higher value than is warranted based on its fundamentals. That's why, while it has come down hard this year, it may still have room to fall even further; I'd avoid the stock.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Micron Technology and Palantir Technologies. The Motley Fool has a disclosure policy.