The Rise and Risks of Palantir: A Look at Wall Street’s AI Powerhouse

For more than two years, bullish sentiment has prevailed on Wall Street. The historic Dow Jones Industrial Average, the widely watched S&P 500, and the growth-focused Nasdaq Composite have all achieved record high closes. Among the many factors influencing this rise, the artificial intelligence (AI) revolution stands out as a significant driver of stock market momentum.

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AI is revolutionizing software and systems, allowing them to think and act autonomously over time, which is transforming the landscape for American companies. PwC analysts predict this technology will contribute an impressive $15.7 trillion to global economic output by 2030.

Image source: Getty Images.

However, when groundbreaking technologies emerge, they can lead to inflated valuations based on early trends. Notably, last year, I suggested that semiconductor giant Nvidia (NASDAQ: NVDA) might be the market’s biggest bubble stock. Recently, shares of Nvidia dropped over 20% from their peak as concerns about DeepSeek raised questions about the hardware needed for training large language models.

While Nvidia remains expensive, it seems that the title of “Wall Street’s largest bubble stock” might be shifting to AI-focused data company Palantir Technologies (NASDAQ: PLTR), as historical trends suggest.

Palantir’s Unique Position and Valuation Premium

Palantir operates two distinct branches: Gotham and Foundry. Gotham provides an AI platform that assists federal governments in data collection and helps military organizations with mission planning. Foundry, on the other hand, utilizes AI and machine learning to help businesses analyze and optimize their data.

For over a decade, Gotham has been a stable revenue source for Palantir, securing long-term contracts with predictable cash flow from government clients. This success has allowed Palantir to achieve profitability ahead of most forecasts on Wall Street.

Gotham is particularly well-positioned due to recent government commitments to protect U.S. AI interests, likely leading to an increase in contracts for its services.

In comparison, Foundry is rapidly expanding but is still in the early stages of growth. By the end of 2024, Foundry’s customer count reached 571, reflecting a 52% increase from the previous year.

Other companies may provide some software solutions that Palantir does, but none match the scale of their offerings. This irreplaceable position has led to strong operational cash flow and a premium valuation for Palantir.

On February 3, after market close, Palantir exceeded Wall Street’s expectations with fourth-quarter sales of $827.5 million—a 36% year-over-year increase—well above the consensus estimate of $781.2 million. They also provided a 2025 sales forecast of $3.741 billion to $3.757 billion, surpassing the Wall Street prediction of $3.53 billion.

As of late February 3, Palantir’s shares were trading at $102.79, giving it a market cap around $237 billion.

Image source: Getty Images.

Palantir Technologies: A Potential Bubble in 2025?

Palantir has been the standout AI stock over the past two years. The key question now is whether its stock can sustain its rapid ascent.

History suggests that it might struggle for two main reasons.

First, Palantir faces the risk of an AI stock bubble that could burst. Every major tech innovation, including the internet boom of the 1990s, has seen similar cycles. This doesn’t mean AI won’t prove successful over time. Instead, it highlights how investors often misjudge early technological adoption.

If an AI bubble arises and collapses, companies like Palantir, with high valuations in a cutting-edge sector, often suffer the most. However, Palantir’s long-term contracts can provide more stable cash flow compared to companies like Nvidia, providing some defense against potential downturns.

The second concern centers around Palantir’s valuation, especially its price-to-sales (P/S) ratio, which is currently exorbitant.

PLTR P/S Ratio data by YCharts. The chart reflects P/S data up to September 30 and has not yet included the recent fourth-quarter report.

Looking back at the dot-com bubble, tech giants like Amazon and Cisco Systems peaked near a P/S ratio of 40. Notably, Nvidia may have reached around 42 last summer.

Palantir, however, currently has an eye-popping P/S ratio of 83, based on its trailing-12-month (TTM) sales of $2.866 billion and its market cap during after-hours trading on February 3. In my more than 26 years of investing, I have never seen such a high P/S ratio maintained by a market-leading company.

Additional challenges also loom, extending beyond historical trends, suggesting that investors should approach with caution.