Is Palantir Technologies a Buy?

Palantir Technologies (NASDAQ: PLTR) stock cannot be stopped. At least, that's the way things look at the halfway mark of 2025. As of this writing, Palantir shares have advanced 73% year to date. That's on top of a 341% rally last year.

The only question is: Can this incredible run continue? To get to the bottom of that, let's examine why Palantir has been one of the top beneficiaries of the artificial intelligence (AI) revolution.

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Image source: Getty Images.

What's the bull case for Palantir stock?

Let's begin by looking at the bull case for Palantir.

First: Palantir continues to land key government contracts. The company has long-standing partnerships with American and European government agencies, both military and civilian. In the U.S., Palantir counts among its partners the Department of Defense, the U.S. Intelligence Community, the Health and Human Services (HHS) department, Immigration and Customs Enforcement (ICE), and the Federal Aviation Administration (FAA).

Moreover, in some cases, Palantir is tasked with mission-critical objectives that could include highly sensitive or classified information. As geopolitical tensions increase and the AI arms race between the U.S. and China intensifies, Palantir could benefit as American lawmakers pour further government resources into AI.

Turning to fundamentals, Palantir's strong revenue growth of 39% and a significant backlog of $1.9 billion of remaining performance obligations (RPO) point to the company's continued strength. In addition, while exact estimates vary, Palantir's total addressable market (TAM) could grow to over $1 trillion within the next decade, which would provide even more opportunities for Palantir within the governmental and private sectors.

What are the risks for Palantir stock?

So what about the downside risks?

First off, there's Palantir's current valuation. With a sky-high price-to-sales (P/S) ratio of 113x, there's little room for error. If the company misses estimates for sales, earnings, or client growth, its stock price could plummet.

PLTR PS Ratio data by YCharts

Second, Palantir's bevy of government contracts aren't just a benefit; they're also a risk. If government spending were to contract or if Palantir were to fall out of favor, its high concentration of government work could drag down its overall growth rate. Similarly, some lawmakers have raised privacy concerns related to Palantir's federal government work.

Palantir issued a strong rebuttal, denying reports that it was building a "master database" and noting its 20-year history of working with administrations of both political parties. Nevertheless, Palantir's close ties to government agencies could invite future blowback.

Next, there is dilution risk. In short, Palantir pays out a lot of stock-based compensation -- over $720 million worth over the last 12 months. That dilutes existing shareholders. In fact, over the last 12 months, Palantir's shares outstanding have increased by 5%. So far, the dilution hasn't slowed down Palantir's skyrocketing stock price, but it could at some point in the future.

PLTR Shares Outstanding data by YCharts

Finally, there's the ever-present risk of a downturn in the economy or the stock market. In particular, if sentiment were to turn bearish, Palantir's stock could fall rapidly, as its valuation is very high.

Is Palantir stock a buy right now?

While the risks to owning Palantir stock are real, the bull case is more persuasive to me. Therefore, the real question investors should ask themselves when it comes to Palantir stock is whether they have the conviction to hold it for the long term. Shares are expensive; they are likely to experience drastic sell-offs.

However, Palantir's enormous TAM points to its massive potential. Given the stock's risks and likelihood of a pullback, long-term investors would be wise to buy shares on the dip, or perhaps dollar-cost average into a position. In other words, Palantir shares are to be owned -- not traded.

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Jake Lerch 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.