Where Will Palantir Stock Be in 3 Years?

Over the last couple of weeks, stocks in the technology sector have been selling off as investors entered a panic fueled by the Chinese artificial intelligence (AI) start-up DeepSeek. One AI company that has bucked the trend, however, is data analytics provider Palantir Technologies (NASDAQ: PLTR).

So far this year, Palantir is the highest performing stock in the S&P 500 (SNPINDEX: ^GSPC) -- gaining 48% as of this writing (Feb. 12).

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Let's explore why Palantir's shares are rocketing higher while many of its peers continue selling off. I'll detail why Palantir's gains are justified and assess where shares could be headed over the next few years.

What is fueling Palantir stock right now?

The chart below illustrates Palantir's quarterly revenue trends for the last couple of years. To me, the steepening slope of the revenue lines validates that demand is not just strong for Palantir's AI product suite -- it's accelerating.

PLTR Revenue (Quarterly) data by YCharts

What makes the financial profile even better is that Palantir is consistently achieving high levels of operating leverage. What I mean by that is the company's profit margins are widening, thereby strengthening Palantir's cash-flow generation and liquidity position.

Strong unit economics places Palantir in an advantageous position relative to its peers in the software arena, many of which are still burning cash or simply aren't growing at anywhere near the pace of Palantir.

Analyzing Palantir's valuation

Palantir has entered a phase in which, each quarter, the company seems to blow Wall Street's estimates out of the water. While this is encouraging, I would argue that it's not totally uncommon for top-tier growth companies to be able to do this. As such, I think investor enthusiasm for Palantir should be indexed against a thorough valuation analysis to see if the company's share price gains are warranted.

PLTR PS Ratio data by YCharts

In the chart above, I've benchmarked Palantir against a cohort of leading software companies in the data analytics and security spaces. The clear anomaly shown is Palantir's valuation relative to its peers. The company's price-to-sales (P/S) ratio of 100 is more than threefold the next closest comparable company.

When you take profits into account, Palantir's valuation appears even more stretched. Right now, Palantir trades a price-to-earnings (P/E) multiple of over 600 and a forward P/E ratio of roughly 200.

Where will Palantir stock be three years from now?

On the one hand, I applaud Palantir for its ability to compete in such an intense environment -- namely, enterprise software. The company has demonstrated its ability to navigate around big tech and carve out lucrative pockets for itself in the broader AI realm.

But while this is encouraging to see, I think the company's valuation has become disconnected from reality. To me, it's just too difficult to see a company doing roughly $3 billion in revenue trading at a market capitalization of over $260 billion. This isn't to say that Palantir's prospects aren't bright, but the ongoing momentum in the stock should make investors think twice about where shares could be headed in the long run.

As time goes on, expectations are likely going to be exponentially higher with each passing earnings call. As such, Palantir is in somewhat of an unenviable position -- the company could have a terrific quarter but not live up to lofty (and unrealistic) expectations, making a sell-off in the stock possible at any time.

While I very much believe in Palantir's long-term vision, my candid opinion is that the stock is overvalued today. And for this reason, I actually wouldn't be surprised to see the company's valuation begin to normalize over the next few years. At this point, I think Palantir is more of a stock to trade than buy and hold. If you're a long-term investor looking for exposure to growth stocks in the AI sector, I think there are more prudent options than following the momentum in Palantir at this moment.

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Adam Spatacco has positions in Palantir Technologies. The Motley Fool has positions in and recommends CrowdStrike, Datadog, MongoDB, Palantir Technologies, and ServiceNow. The Motley Fool has a disclosure policy.