Palantir Hits Top 20 Most Valuable Companies—Time to Buy or Time to Bail?

Palantir rockets into the elite top 20—but is this data darling a smart play or just another overhyped tech stock?

Wall Street's latest obsession just hit a milestone most companies only dream of. The big-data disruptor now sits comfortably among corporate giants, but skeptics whisper 'bubble.'

Bulls see untapped potential in government contracts and AI analytics. Bears see valuation metrics that would make even 2021 crypto bros blush.

One thing's certain: This isn't your grandfather's blue chip. Volatility comes standard with Palantir stock—perfect for investors who think rollercoasters don't have enough G-forces.

As always in tech investing: The bigger they come, the harder reality checks hit. Just ask anyone who bought the Meta dip... in 2022.

Image source: Getty Images.

Where Palantir stands in the marketplace

Palantir has become known as a big-data company that can leverage functions such as artificial intelligence (AI) and machine learning to deliver analytical insights. It started in the national security realm, earning early recognition for helping the U.S. government find Osama bin Laden.

Later, it applied these skills to commercial use, attracting more customers. However, its generative AI-driven Artificial Intelligence Platform (AIP) has revolutionized the company's operations.

Customers began to report huge productivity gains. In one case, AIP helped a company achieve in one day more than what a hyperscaler could do in four months. One insurer also reduced its process for automating underwriting workflows from two days to just three hours.

Seeing such results is bullish for Palantir's value proposition, and the company seems to have a bright future as more companies turn to its productivity tools. One Morningstar analyst believes Palantir's addressable market is between $1.2 trillion and $1.8 trillion.

As investors discovered these benefits, they steadily bid the stock higher, a growth phase that reached a fever pitch after the 2024 presidential election. Consequently, the stock has risen 475% just in the last 12 months.

What the financials say

Unfortunately, the financials seem to indicate more growth potential than results. Over the last 12 months, the company has generated around $3.1 billion in revenue.

That figure indicates tremendous potential in what could be a $1.2 trillion addressable market. Nonetheless, it represents a small fraction of a $372 billion market capitalization, indicating a price-to-sales ratio (P/S) of 126. In comparison, the average P/S for theis 3.25, and even many growth stocks trade at less than 20 times sales.

The earnings results also appear to point to considerable overvaluation. Over the last 12 months, the company reported a net income attributable to common shareholders of $570 million. That leaves investors with a price-to-earnings ratio (P/E) of more than 685. Unfortunately, significant improvements in earnings do not seem to bolster its buy case amid a forward P/E of more than 270.

And even if the improved earnings were to continue, the forward one-year P/E is nearly 215, indicating that the growth WOULD have to persist for several years to justify the current valuation. Thus, even if investors can still win in the long term with this stock, the potential downside that Palantir could face may not justify the risks associated with buying the stock now.

Is Palantir a buy now?

Under current conditions, investors should refrain from purchasing additional shares of Palantir. Its addressable market and growth trajectory indicate that the stock is an eventual winner, even at today's prices.

Still, the elevated valuation poses a significant risk. Currently, the stock could lose three-fourths of its value and still be considered "overvalued" in a technical sense.

And if market sentiment turns negative, investors will likely turn on highly valued stocks such as Palantir, possibly leading to years of paper losses. For these reasons, you should probably wait for a considerable pullback before buying the stock or seek returns in other investments.