Palantir 's (NYSE: PLTR) stock has been one of the best to own in 2024, rising more than 150% in 10 months. This recently allowed Palantir stock to notch a new all-time high for the first time since 2021.
That sentence may cause investors to falsely assume that something bad happened to Palantir between 2021 and 2024, as the stock took quite a bit of time to hit a new record. Palantir is a much-improved company compared to the version investors saw in 2021. In 2021, it was wrapped up in a software-as-a-service (SasS) bubble, which caused its valuation to become inflated and out of control.
Palantir's valuation today appears to be similarly inflated, which could be an issue for investors .
Palantir's software is seeing strong demand
Palantir's product is AI software that can be configured to tailor any business or need. Originally, Palantir's product suite was aimed at government clients, but Palantir expanded its reach to include commercial businesses as well. Essentially, the idea behind Palantir's software is to take mountains of data inputs and deliver real-time information to guide decisions.
Palantir has also launched a product, Artificial Intelligence Platform (AIP), that allows large language models (LLMs) to be integrated throughout a business. By integrating generative AI capabilities into a business's internal systems rather than as a side program, companies can control how the model learns and ensure that proprietary information stays internal.
The demand for Palantir's software has been incredible, and some have compared Palantir to Nvidia , at least on the software side of AI. However, I think that's a huge stretch, as the expectations for Palantir's stock have far exceeded business results.
The stock has gotten too expensive to make a reasonable return
If the only information you had about Palantir was today's AI-enthralled investing environment and that some are comparing Palantir to Nvidia, you may assume that Palantir's revenue is doubling year over year. That's not the case, even if its revenue growth is seen as strong.
In Q2, Palantir's revenue rose 27% year over year to $678 million. That's strong growth that investors cheer on, but it's far from a company like Nvidia. Additionally, its quarter-over-quarter revenue growth was 7%, so it's not like it saw a rapid increase in just one quarter.
Compared to early 2021 when Palantir last hit a new all-time high, Palantir's revenue growth isn't nearly what it used to be, although it is accelerating.
PLTR data by YCharts
However, the problem with Palantir's stock in 2021 is that it was drastically overpriced, as its price-to-sales (P/S) ratio demonstrates. At its peak, Palantir's stock traded for 46 times sales, but it's not far away from that right now.
PLTR PS Ratio data by YCharts
Under normal conditions, if a company's revenue doubled, but its stock price stayed the same, its P/S ratio would be cut in half. However, because Palantir heavily relies on stock-based compensation for its employees, its share count has increased significantly, making each share worth less (a mechanism similar to inflation).
PLTR Shares Outstanding data by YCharts
As a result, Palantir's stock is still incredibly expensive despite the business looking far better now than it did in 2021.
Unfortunately, I think 2024 or 2025 will end similarly to 2021 for Palantir. Palantir's stock is too expensive to buy here, as the expectations are far too high.
Wall Street expects 24% revenue growth in 2024 and 21% in 2025. But let's throw those expectations out the window and say that Palantir could grow revenue at a 35% rate for the next five years.
It would generate more than $11 billion in annual revenue if it did that. Palantir has steadily improved its profit margins, so I'll assume that it can reach 30% profit margins like other mature software businesses. If Palantir did that, the stock would trade for 29.2 times trailing earnings.
Essentially, you'd have to give up five years of growth for the stock to trade at a reasonable level, and that's with a likely unreasonable growth projection. If you ran that same calculation with 20% growth for five years, the stock would trade at 53 times earnings.
Palantir has grown since 2021; however, because of hefty stock-based compensation and inflated expectations, I'm afraid that this investment won't end well unless the company sees a massive demand acceleration. As a result, I think investors should use this new all-time high to sell off some of their position, as expectations have far outpaced reality.
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Keithen Drury has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy .
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