Has Palantir Technologies Stock Peaked at $125? History Paints a Clear Picture of What's to Come.

For more than two years, Wall Street has been in a seemingly unstoppable bull market rally. Since the end of 2022, the ageless Dow Jones Industrial Average, widely followed S&P 500 (SNPINDEX: ^GSPC), and growth stock-powered Nasdaq Composite have respectively motored higher by 31%, 57%, and 87%, as of the closing bell on Feb. 21.

While a confluence of factors has been the wind in Wall Street's sails, such as better-than-expected corporate earnings and Donald Trump's November victory, it's the evolution of artificial intelligence (AI) that's inspired this optimism more than anything else.

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With AI, software and systems are given the tools to reason, make split-second decisions, and evolve over time, all without the need for human intervention. This capacity to become more proficient over time at assigned tasks, as well as learn new skills, gives this game-changing technology a mouthwatering addressable market.

Image source: Getty Images.

AI stocks have soared in response to aggressive enterprise spending on AI solutions and the long-term potential of this technology. While Nvidia had been the hottest stock in the AI arena -- its graphics processing units (GPUs) are the clear top choice in high-compute data centers -- it's been supplanted by another industry-leading highflier: Palantir Technologies (NASDAQ: PLTR).

Since 2023 began, Palantir's stock catapulted from around $6 per share to an intra-day high of $125.41 on Feb. 19. All told, this parabolic move higher added more than $260 billion in market value.

The all-important question is: Has Palantir stock peaked at $125? History can be the guide that answers this query.

Palantir's uniqueness, profitability, and balance sheet have fueled its parabolic move higher

But before making predictions about the future, it's important to understand how data-mining specialist Palantir became one of Wall Street's most-influential tech stocks.

The primary catalyst above all others that's fueled this rally is Palantir's moat. This is a company with two core operating segments -- Gotham and Foundry -- that have no one-for-one replacement at scale.

Gotham is the company's AI-powered software-as-a-service (SaaS) platform that assists federal governments with collecting and analyzing data, as well as planning and executing military missions. This security-focused platform typically secures multiyear contracts from the U.S. government and its immediate allies.

Meanwhile, Foundry is Palantir's newer SaaS platform that leans on machine learning to help businesses make sense of their data. This is a subscription-based service that assists with data integration, workflow management, supply chains, and decision-making. Since it's a relatively new segment, rapid growth in commercial customer count should help sustain strong double-digit sales growth.

Secondly, Palantir's otherworldly rally is a function of the company generating a recurring profit well ahead of the timeline Wall Street analysts had expected. Ongoing profitability validates the consistency of Palantir's operating cash flow, which is being powered by the transparency of multiyear government contracts with Gotham, and the predictability of subscription revenue from Foundry.

The final piece of the puzzle for Palantir is its cash-rich balance sheet. It closed out 2024 with $5.23 billion in combined cash, cash equivalents, and marketable securities, with no debt. This cash buffer ensures that Palantir can successfully navigate an economic downturn, and allows the company to invest in ongoing innovation.

But is all of this worth $125 per share and north of $282 billion in market value? A trio of historic markers paints a clear picture.

Image source: Getty Images.

History weighs in on Palantir's jaw-dropping ascent

Although history isn't guaranteed to repeat on Wall Street, it does have a tendency to rhyme. Best of all, history removes the emotion from investing and allows for data to be looked at objectively.

The first potential historic monkey wrench for Palantir is that next-big-thing innovations have a checkered past. Over the last three decades, every hyped next-big-thing trend has, eventually (key word!), worked its way through a bubble-bursting event.

When the internet began going mainstream in the mid-1990s, there was an abundance of hype regarding the ability of this technology to open new sales and marketing channels domestically and abroad. However, the dot-com bubble bursting in the early 2000s is a testament that it takes time for game-changing technologies to mature and for businesses to understand how to optimize them. Since the mid-1990s, the internet, genome decoding, nanotechnology, 3D printing, blockchain technology, and the metaverse have all followed this same script.

If historic precedent holds true once again and the AI bubble bursts, emotion-driven investors will almost certainly weigh on Palantir's stock. Though Palantir's multiyear contracts for Gotham and transparent subscription revenue for Foundry should help to blunt some of the pain, companies valued at a premium tend to be hit hard when bubbles burst.

Palantir's company-specific valuation is another source of trouble. While businesses that possess competitive advantages and/or moats are deserving of a valuation premium, there are limits to how far this premium can be stretched.

PLTR PS Ratio data by YCharts.

Historically, market-leading business of next-big-thing trends have often peaked in a range of roughly 30 to 40 times trailing-12-month sales. This is around where Amazon, Cisco Systems, and Microsoft topped out prior to the dot-com bubble, and is on par with Nvidia's peak price-to-sales (P/S) ratio of 42 last summer.

Comparatively, Palantir stock peaked at a P/S ratio of 99 last week, which is well over double the multiple typically observed from market-leading businesses hyped by a game-changing technology. Maintaining its P/S ratio of 83, as of the closing bell on Feb. 21, should prove virtually impossible.

The third and final historic factor that comes into play is the broader market's valuation. In recent weeks, the S&P 500's Shiller price-to-earnings (P/E) Ratio, which is also referred to as the cyclically adjusted P/E Ratio (CAPE Ratio), has been hovering around 38.

To put this figure into context, it's more than double the average Shiller P/E reading of 17.21, when back-tested 154 years. It also represents the third-highest reading during a continuous bull market in history.

There have only been six instances since January 1871 where the S&P 500's Shiller P/E surpassed a reading of 30 for at least two months. The prior five occurrences were all eventually followed by declines in the S&P 500 or Dow Jones Industrial Average of 20% to 89%. Once again, companies with premium valuations tended to be hit the hardest when these stock market corrections occurred.

Based solely on what history tells us, Palantir's stock has likely peaked at $125 and could face meaningful downside in the quarters to come.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Sean Williams has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Cisco Systems, Microsoft, Nvidia, and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.