Here's When I Would Buy the Dip on Palantir's Stock

Palantir (NASDAQ: PLTR) stock hasn't been immune to the broad stock market sell-off over the past few weeks. Although stocks got a nice bump on Wednesday, Palantir is still down around 25% from its all-time high.

With the stock down that much, many investors are likely wondering if right now is a prime opportunity to pick up some shares. However, I don't think the stock price has dropped low enough, as there are still extreme expectations built into Palantir's stock. I've got a particular dollar figure in mind for when I'd be a buyer of Palanatir stock, and the number might shock you.

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Palantir's AI platform has a wide customer base

Palantir has risen to the top of the list of artificial intelligence (AI) investment ideas because it is one of the few companies that is essentially a pure-play AI investment. Its AI-driven data analytics software program has been around for much longer than many other companies in its space, which also gives it more credibility. As another bonus, Palantir's largest customers are various governments around the globe. This is a great client base to have, as there aren't many companies that provide software solutions specifically meant for government applications. Government growth has been nearly the same as commercial sector growth, so this dual growth path has been a huge boost for Palantir.

These are all massive bonuses for Palantir's stock, which is why it has risen so much since 2024. Even after the sell-off, Palantir's stock is up over 400% since the start of 2024, which is a figure that few stocks can match.

Another key part of Palantir's rise has been its improving profitability. While there are very few pure-play AI investments on the market, even fewer actually turn a profit. This puts Palantir in a class of its own, which is why it has become a top AI stock pick. However, I think the stock has gotten far too expensive to purchase here, and I'd need the stock to drop even more before I ever consider buying it.

Palantir's stock still hasn't sold off enough to be worth buying

So, what's the price I'd be a buyer? Let's walk through the math first before I shock you with the value.

Despite the sell-off, Palantir's stock trades at a pricey valuation.

PLTR PS Ratio data by YCharts

At the time of this writing, Palantir trades for an expensive 79 times sales and 165 times forward earnings. Those valuations convey that a stock must be doubling or tripling its revenue each quarter, but it's not. In its most recent quarter, Palantir's revenue rose 36% year over year, and management gave guidance for 36% growth again in Q1.

For reference, another outstanding AI pick over the past few years was Nvidia. At its peak, Nvidia grew revenue at a 265% year-over-year pace and traded for around 40 times sales at that time. Palantir is nowhere near that growth rate, yet trades at a far higher premium than Nvidia ever did.

Software companies that are growing at this rate usually trade between 10 and 20 times sales. So, even if I use the high end of that range, I wouldn't be a buyer of Palantir's stock until it declines another 75% from today's prices. That means I'd consider picking up shares if the stock price hit $23. That's a long way from the $90 or so it's trading at right now, and it would take a lot of selling to hit that level.

The expectations built into Palantir's stock aren't matched with reality, so I'm avoiding the stock even though it has already sold off a bit from its highs. There are far too many AI investments that have much more attractive valuations than Palantir, and those are the ones that investors should focus on right now.

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