Is This Top Holding at Cathie Wood's Ark Invest Worth Adding to Your Portfolio?

Cathie Wood -- the founder and CEO of investment management firm Ark Invest -- has made her name by betting big on disruptive and innovative companies. This strategy reaped rich rewards in 2023 and 2024 as her flagship exchange-traded fund, the ARK Innovation ETF, clocked an impressive gain of 82% to beat the S&P 500 index's 53% return by a nice margin.

However, 2025 has been a tough year for the ETF due to broad market weakness. The fund is up just 1% year to date, as of this writing, after making a solid recovery in the past month and a half.

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One of the reasons why the ARK Innovation ETF has bounced back since the beginning of April is because of a strong rally for shares of Palantir Technologies (NASDAQ: PLTR). The software platforms specialist is up over 40% since April 8, driven by the robust demand for the company's Artificial Intelligence Platform (AIP).

Palantir is the sixth-largest holding in the ARK Innovation ETF, and it recently delivered a solid set of results that establish its credentials as a top player in the fast-growing AI software market. Does this mean investors should also make Palantir stock a core holding in their portfolios? Let's find out.

Image source: Getty Images.

Palantir stock is very expensive right now

The Nasdaq Composite index is down 2% so far in 2025. It entered bear market territory last month due to the turmoil stemming from President Trump's tariff announcements, which raised the risk of a global recession. Palantir also tumbled during this period, but its rebound has been swift. As a result, the stock is now trading at 557 times trailing earnings. Its forward price-to-earnings ratio of 220 points toward a big jump in its earnings this year, but it's still very expensive.

While those triple-digit valuation multiples will scare off value-oriented investors, Wedbush analyst Dan Ives believes the software specialist has the potential to more than triple its share price and reach a trillion-dollar market cap in the next three years. That means growth-oriented investors can still consider buying this stock, especially considering the rapidly growing demand for Palantir's artificial intelligence (AI) solutions.

Recent results support a bullish outlook as well. Palantir is landing a significant number of contracts every quarter, which is bolstering its long-term revenue pipeline. For instance, Palantir's revenue shot up 39% year over year in the first quarter, a marked acceleration from the 21% growth it recorded in the same quarter last year.

The company's bottom-line also more than doubled year over year to $218 million. Looking ahead, the company has been signing larger deals due to the growing interest in its AIP, which allows customers to integrate generative AI into their business processes to improve productivity and efficiency.

For instance, the number of $1 million-plus deals signed in Q1 increased 60% year over year to 139. Meanwhile, the number of deals valued at $10 million or more doubled to 31 for the quarter. The significant jump in Palantir's deal sizes can be attributed to a combination of rapid growth in Palantir's customer base and an increase in spending from its existing customers.

The company's overall customer count shot up 39%, and its net dollar retention rate increased 13 percentage points from the year-ago period to 124% last quarter. This metric is calculated by dividing the trailing 12-month (TTM) revenue from Palantir's customers at the end of a quarter by the TTM revenue from those same customers in the year-ago period.

A net dollar retention rate of more than 100% indicates that Palantir's existing customers raised their spending on its offerings. That's not surprising as Palantir points out that its existing customers have been expanding their current deals following the productivity gains they're witnessing after the deployment of AIP.

Should investors buy the stock now?

The AI software platforms market that Palantir serves is expected to grow more than fivefold between 2023 and 2028, generating annual revenue of $153 billion after five years. Palantir's top-line growth in the previous quarter indicates that it is growing almost in line with the end market. However, don't be surprised to see it grow at a faster pace than the AI software platforms space in the future because it's one of the top vendors of AI software platforms as per third-party estimates.

The terrific growth in Palantir's customer base and its ability to win a bigger share of existing customers' wallets are giving its margins a big boost. Its adjusted operating margin shot up by eight percentage points year over year to 44% in Q1, indicating that there is more room for growth on this front.

Not surprisingly, analysts increased their earnings outlook for the company following the Q1 earnings release:

Data by YCharts.

However, Palantir's favorable unit economics could allow it to beat analysts' expectations. That would help the company justify its expensive valuation and deliver more gains. That's why investors who are willing to look beyond its price tag in the near term should consider adding this leading AI stock to their portfolios.

Should you invest $1,000 in Palantir Technologies right now?

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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.