This Artificial Intelligence (AI) Powerhouse Is Up 274% in 12 Months. But Is It a Buy?

The market is suddenly on shaky ground. But sometimes, the mind lets recent events outshine the big picture. Take Palantir Technologies (NASDAQ: PLTR), for example. The powerhouse artificial intelligence (AI) stock has quickly plunged over 30% from its high. Yet, the stock is still up a remarkable 274% over the past year! In other words, things aren't as painful as they might feel.

Of course, that was the past. Potential investors must now look forward to gauge whether this stock is a buy. Should investors buy Palantir now, or is the stock bound to give up more of its past gains?

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Here is what you need to know.

Palantir is genuinely an AI powerhouse

You've probably heard artificial intelligence (AI) referenced more times than you can count. The hype can get a little ahead of reality whenever there's a new technology, especially one with as much potential as AI.

Palantir is a genuinely game-changing AI stock. The company builds custom software applications on its Gotham, Foundry, and AIP technology platforms. These applications use AI, data analytics, and machine learning to produce real-time actionable insights. Palantir helps customers detect fraud, optimize supply chains, coordinate military missions, and do countless other things. Any organization with lots of data could be a potential customer.

Palantir's roots are in government; its work with the U.S. military dates back over a decade. Over half of its total revenue still comes from government business. However, Palantir's momentum in the commercial sector has captivated Wall Street. Revenue has continually accelerated since Palantir launched its AIP platform in mid-2023. Palantir ended 2024 with just 382 U.S. commercial customers. There are over 20,000 large corporations in the U.S. alone. Such flexible software and an underpenetrated market create a massive growth runway for the next decade.

Additionally, Palantir is financially rock-solid. The business is already GAAP profitable, with a stacked balance sheet boasting $5.2 billion in cash and zero debt. Analysts estimate Palantir will grow earnings per share by an average of 25% annually over the long term. Investors have a lot to like here, and it makes sense that the AI stock rocketed higher in a euphoric market.

Putting the stock's valuation in perspective

Here's the thing. As exciting as Palantir's business is, it hasn't kept up with the stock.

Palantir's trailing-12-month revenue has grown 40% over the past three years. Meanwhile, earnings per share have increased an impressive 216%. But the stock? Shares have rocketed over 900%, and that includes the recent decline!

To put that in perspective, consider the S&P 500 index, which trades at approximately 21 times its earnings estimates. The index has grown by approximately 10% annually over the long term. Sure, Palantir should grow its earnings much faster than that, but the stock trades at a forward P/E ratio of 157. Stock valuations set expectations for companies. A high valuation means the company must clear a high bar to justify it.

At over 150 times forward earnings estimates, Palantir's business must knock it out of the park for investors to continue paying that price. Growing earnings by 25% annually is impressive, but I'm skeptical that it justifies the current valuation. Palantir will probably need to do better.

Is the stock a buy now?

The more excessive a stock's valuation, the riskier it becomes.

Palantir is one of the most expensive stocks on Wall Street. If the market volatility continues, its high price and previous investment returns will make it a prime candidate for investors selling to lock in profits or avoid risk. Remember, valuations are like gravity. Palantir's valuation will likely weigh on the stock until the price falls or the business grows enough to reset the valuation to a reasonable level.

That moment hasn't arrived yet, so investors should avoid Palantir Technologies.

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*Stock Advisor returns as of April 5, 2025

Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.