Palantir Technologies (PLTR 2.63%) has been a darling for tech and artificial intelligence (AI) investors over the past year, as it has continually hit new heights despite concerns about its soaring valuation. Lately, however, it has been falling sharply in value, along with the market as a whole. In just the past month, the stock fell more than 25% and it closed on Monday at a price of less than $84-- that's down 33% from its 52-week high of $125.41.
Could this recent drop in value be your chance to buy into one of the hottest AI stocks on the markets?
NASDAQ: PLTR
Key Data Points
Why Palantir may have a lot of room to grow
Palantir is a data analytics company that helps companies in their decision-making processes. Whether it's aiding governments in counterterrorism activities or giving commercial customers the best available information they need to make decisions, Palantir can stand to benefit from opportunities across many industries. The launch of its AI-powered platform has taken things to a whole new level, as is evident with the rapid acceleration of its growth rate in recent quarters.
PLTR Operating Revenue (Quarterly YoY Growth) data by YCharts
During the last three months of 2024, the company reported commercial revenue growth of 64% in the U.S., while U.S. government revenue increased by 45%. Palantir has been on a tear, and its impressive growth is a major reason the stock continues to be a hot buy. Even with the recent fall in value, shares of Palantir are up more than 255% over the past 12 months.
Palantir's valuation remains the biggest obstacle
While there's no denying Palantir has been a phenomenal, fast-growing business over the past few years, investors also can't deny that its valuation is incredibly high. Even with the recent drop in value, the stock is trading at close to a forward price-to-earnings ration of 160, based on analyst expectations.
That is a massive premium investors are paying for the stock. And for that to be justifiable, you would need to believe that there is a tremendous amount of growth still on the horizon for the company. But even under those circumstances, you are effectively paying for a ton of future growth, and it could take years for Palantir's bottom line to catch up with where the stock is right now to make it look like a good investment.
It leaves virtually no margin of safety for the stock, which is why on any kind of bad news related to AI or even a hint that spending may not grow feverishly, the stock could be vulnerable to a significant correction. And that's why this can be a risky investment to hang on to, even despite the company's promising growth opportunities.
Palantir isn't worth its massive price tag
There are many high-powered AI stocks you can invest in, which trade at much more reasonable valuations than Palantir. Even AI chipmaker Nvidia doesn't look so egregiously overvalued -- it trades at just 26 times forward earnings.
Palantir is doing well and there's plenty of growth potential for the business, but that doesn't mean investors should ignore its valuation. Buying the stock at a huge premium could result in limited returns, or worse -- significant losses, if reality doesn't line up with expectations. While Palantir's stock is certainly cheaper than it was a few weeks ago, it still could fall a whole lot further than where it is now. Investors will likely be better off pursuing growth stocks that are trading at much more reasonable valuations.
