Is the Newest Member of the Nasdaq-100 -- a 764% Gainer Since Its IPO -- a Buy Going Into 2025?

Outside of megacap technology companies, I'd argue that data analytics specialist Palantir Technologies (NASDAQ: PLTR) is the hottest name in the artificial intelligence (AI) realm. Palantir marked a lot of milestones this year -- most recently the company's entrance into the Nasdaq-100 index.

While Palantir's early days as a public company were pretty rocky, the company has really come into its own over the last two years. Of course, Palantir can credit its current growth trajectory to unprecedented demand for AI. But with shares gaining 764% since its initial public offering (IPO), is now a smart time to invest in Palantir?

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Below, I'm going to break down Palantir's foray into the AI landscape and take a close look at the company's tailwinds. Moreover, I'll detail a thorough valuation analysis to help you determine if buying Palantir stock is right for you.

Why does Palantir stock keep climbing?

In April 2023, Palantir launched its fourth software suite, called the Artificial Intelligence Platform (AIP). AIP has been nothing short of a smash for Palantir, helping the company quickly penetrate the private sector and win business over legacy enterprise software incumbents. Palantir's revenue diversification (away from its almost exclusively public sector base up until two years ago) resulted in better margins, consistent profitability, and excess cash flow.

Furthermore, throughout much of 2024 Palantir has partnered with several names in big tech including Microsoft, Oracle, Meta Platforms, and Amazon. The primary focus of many of these partnerships is to marry their respective cloud computing infrastructures with AIP, specifically in classified environments with the U.S. military and adjacent defense operations. In other words, while Palantir continues to make headway in its commercial segment, the company has quietly found new avenues to reaccelerate growth in its legacy government business.

Palantir's success in the AI landscape has led to a flurry of buying activity in the stock from a combination of retail investors and notable institutional funds. While this all appears like a recipe that makes Palantir a no-brainer investment, the company's run may be becoming disconnected with reality when it comes to valuation.

Image source: Getty Images.

Valuing Palantir is tough

Valuing Palantir is pretty challenging. In the graph below, I've benchmarked the company against a cohort of other enterprise software companies using the price-to-sales (P/S) ratio. At a P/S of 73, Palantir is approximately 3 times more expensive than the next closest comparable stock in this cohort.

However, I personally don't see the P/S ratio as all that useful. To me, profitability is a more important measure of a company's growth as it illustrates the ability to reinvest into the business and fund future projects.

While Palantir does generate positive net income and free cash flow, the company's profitability profile is nowhere near mature. To add some context here, Palantir currently trades at a price-to-earnings (P/E) multiple of 403, and a forward price-to-earnings ratio of 167. In either case, it's simply not appropriate to measure Palantir using traditional earnings-based valuation methodologies.

PLTR PS Ratio data by YCharts.

One final line of defense is to look at the PEG ratio. The PEG ratio can be useful because it accounts for earnings growth over the course of several years. A general rule of thumb is that a PEG ratio above 1 signals the stock could be overvalued. Right now, Palantir's PEG ratio is 3.5.

By all accounts, Palantir is an expensive stock to own at its current valuation. Moreover, the stock's current valuation expansion (as seen above) isn't over, and the momentum doesn't appear to be slowing down.

Is Palantir stock a buy right now?

While Palantir stock is undoubtedly pricey, I don't see it as a stock to ignore. The company has done an impressive job diversifying its business by penetrating the private sector, while also identifying creative ways to reaccelerate its government business through the power of strategic partnerships with big tech and other defense contractors.

I do see Palantir as a company that will remain a leader in the AI revolution, and so I think it's likely that even better days are ahead for investors. I think the best strategy regarding an investment in Palantir is to dollar-cost average over a long-term time horizon, as well as looking to bolster a position by taking advantage of sell-offs and valuation resets.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Adam Spatacco has positions in Amazon, Meta Platforms, Microsoft, and Palantir Technologies. The Motley Fool has positions in and recommends Amazon, CrowdStrike, Datadog, Meta Platforms, Microsoft, MongoDB, Oracle, Palantir Technologies, ServiceNow, and Snowflake. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.