Palantir Stock Faces Increased Scrutiny Amid Market Volatility

Palantir (NASDAQ: PLTR) Stock has been affected by a widespread Stock market downturn in recent weeks. While stocks experienced a rebound on Wednesday, Palantir remains approximately 25% below its all-time high.

Given this significant price drop, many investors may ponder if this is the right time to buy shares. However, the stock price does not appear low enough to justify a purchase, as high expectations continue to be baked into Palantir’s Stock. I have a specific price point in mind before considering a buy, and it may come as a surprise.

Palantir’s Strong AI Presence and Customer Base

Palantir has emerged as a leading choice for artificial intelligence (AI) investments due to its unique position as a pure-play AI company. Its AI-driven data analytics platform has been available longer than many competitors, contributing to its credibility. Additionally, Palantir’s primary clients include various government agencies worldwide, offering a distinct advantage since few companies specialize in government software solutions. This dual growth from both government and commercial sectors has significantly bolstered Palantir’s performance.

These factors explain Palantir’s remarkable surge since the beginning of 2024. Despite recent market corrections, its Stock has increased by over 400% this year, a rate that few stocks can achieve.

Improving profitability has also played a crucial role in Palantir’s ascent. Few AI-focused companies are generating profits, setting Palantir apart as an attractive option. Nevertheless, I believe the current stock prices are too steep to warrant a buy, and I’d prefer to see a more considerable decline before making a purchase.

Valuation Challenges and Future Price Expectations

So, what price would prompt me to invest? Let’s first review the current valuation metrics.

Palantir’s Stock, despite the recent sell-off, commands a high valuation.

PLTR PS Ratio data by YCharts

Currently, Palantir trades at a significant 79 times sales and 165 times forward earnings. Such high valuations suggest expectations of rapid revenue growth, yet Palantir’s most recent quarterly revenue increased by only 36% year over year, with similar guidance for the upcoming quarter.

For context, another successful AI stock, Nvidia, once experienced quarter-over-quarter revenue growth of 265% and traded for approximately 40 times sales at its peak. In contrast, Palantir, with significantly slower growth, is trading at a much higher premium.

Typically, software companies with similar growth rates trade at valuations between 10 to 20 times sales. Based on the high end of that estimate, I would not consider buying Palantir’s Stock until it decreases by another 75% from current levels. This translates to a target price of $23 per share—far removed from its current trading price around $90, necessitating substantial market selling to reach that point.

The inflated expectations surrounding Palantir’s Stock do not align with present realities. Consequently, I will refrain from investing in Palantir at this stage, given the availability of other AI investments with more favorable valuations.

Final Considerations for Investing in Palantir Technologies

Before deciding to invest in Stock from Palantir Technologies, consider the following:

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Keithen Drury holds a position in Nvidia. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool maintains a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.