Palantir Stock Surges 585% Since January 2024: What Comes Next?

Palantir Technologies (PLTR 1.06%) recently posted fourth-quarter financial results that significantly exceeded Wall Street expectations. As a result, the stock has surged, achieving a remarkable total return of 585% since January 2024.

During this impressive period, Palantir stood out as the top performer among the S&P 500 (^GSPC -0.01%), outperforming the next best stock by a staggering 250 percentage points. However, this remarkable growth has led to Palantir becoming one of the priciest software stocks ever recorded, raising concerns about the sustainability of its current valuation.

Palantir's Price-to-Sales Ratio: A Historical Context

In a recent interview with CNBC, Brent Thill of Jefferies praised Palantir for its strong execution in the fourth quarter. However, he also pointed out that the stock currently boasts a forward price-to-sales (PS) ratio over 55. This valuation is rare and has never been maintained by any company in the software sector. The forward PS ratio reflects the market value of a company relative to its estimated revenues for the upcoming year.

My own analysis of over 50 software stocks from the past decade highlighted the following key points:

• Only five other software companies have achieved a forward PS ratio above 40: Asana, Confluent, Snowflake, UiPath, and Unity Software.
• Out of these, only Snowflake reached a forward PS ratio exceeding 50, peaking just under 60 times forward sales in November 2021.
• After hitting their peak valuations, all these stocks experienced declines of more than 50% over the next year, with maximum declines surpassing 70%. They are still at least 50% below their all-time highs today.

As of February 13, Palantir's forward PS multiple stands at 56, marking it alongside Snowflake as one of the few software companies to reach such elevated valuation levels. The history of Snowflake, which faced a severe stock crash after achieving a similar valuation despite robust revenue growth, raises red flags for Palantir. Snowflake's revenue was increasing at over 100% when it reached its peak valuation, whereas Palantir's trailing-12-month revenue grew only 29% in 2024, with an expected 32% growth in 2025. This stark difference puts additional pressure on Palantir's valuation.

This does not mean that Palantir is set for a drastic downturn in the immediate future. However, all indicators suggest that its forward PS multiple is likely to decrease, which can occur in one of three ways: Wall Street analysts could substantially revise their revenue growth predictions, Palantir shares could decline sharply, or a combination of both scenarios could unfold.

Palantir: A Strong Business with Risks at Current Valuation

Palantir has received accolades for being a leader in decision intelligence software, according to the International Data Corporation (IDC). In addition, Forrester Research has recognized Palantir as a technology leader in artificial intelligence platforms, giving its AIP product higher ratings than comparable offerings from companies like Alphabet's Google, Amazon, and Microsoft.

This favorable positioning suggests that Palantir has strong growth prospects ahead, particularly as IDC forecasts that AI platform spending will increase by 40% annually through 2028. However, even the best companies should not be purchased at any price. The high forward PS multiple associated with Palantir serves as a warning sign that investors need to heed.

Existing shareholders might want to consider reducing their investments, especially if Palantir constitutes a substantial portion of their portfolio. Likewise, potential investors should place the stock on their watchlists, as better buying opportunities are anticipated in the near future.

For instance, even with Snowflake currently 52% below its record high, it still sits 77% higher than its all-time low. This situation has offered investors numerous chances to profit since Snowflake's steep decline in early 2022. A similar scenario might unfold for Palantir—waiting for a more favorable entry point is crucial rather than chasing a stock with an excessively high valuation.

Palantir, Stocks, Valuation