Is the newest member of the Nasdaq-100 – a 764% gain since IPO – a buy heading into 2025?

On December 26, 2024By Littum

Outside of megacap technology companies, I would argue that the data analytics specialist Palantir Technologies (NASDAQ: PLTR) is the hottest name in artificial intelligence (AI). Palantir marked a lot of milestones this year – most recently the company’s entry into Nasdaq-100 index.

While Palantir’s early days as a public company were pretty rocky, the company has really come into its own over the past two years. Of course, Palantir can credit its current growth trajectory to an unprecedented demand for AI. But with shares up 764% since its initial public offering (IPO), is now a smart time to invest in Palantir?

Below, I’ll break down Palantir’s foray into the AI landscape and take a closer look at the company’s tailwinds. In addition, I will detail a thorough valuation analysis to help you decide if buying Palantir stock is right for you.

In April 2023, Palantir launched its fourth software package, called Artificial intelligence platform (AIP). AIP has been nothing short of a smash for Palantir, helping the company quickly penetrate the private sector and win business over legacy enterprise software incumbents. Palantir’s revenue diversification (away from its almost exclusively public sector business until two years ago) resulted in better margins, consistent profitability and excess cash flow.

Furthermore, through much of 2024, Palantir has collaborated with numerous names in big technology, including Microsoft, Oracle, Meta platformsand Amazon. The primary focus of many of these partnerships is to combine their respective cloud computing infrastructures with AIP, specifically in classified environments with the US military and adjacent defense operations. In other words, while Palantir continues to make progress in its commercial segment, the company has quietly found new ways to accelerate growth in its legacy government business.

Palantir’s success in the AI landscape has led to a flurry of buying activity in the stock from a combination of retail investors and notable institutional funds. While all of this sounds like a recipe that makes Palantir a no-brainer investment, the company’s run may be getting disconnected from reality when it comes to valuation.

A person looks at a stock chart with his hand on his head. — Image source: Getty Images.

Valuing Palantir is quite challenging. In the graph below, I’ve compared the company to a cohort of other enterprise software companies using the price-to-sales (P/S) ratio. With a P/S of 73, Palantir is approximately 3 times more expensive than the next closest comparable stock in this cohort.

However, I personally don’t see the P/S ratio as that useful. To me, profitability is a more important measure of a company’s growth, as it illustrates the ability to reinvest in the business and fund future projects.

Although Palantir generates positive net income and free cash flow, the company’s profitability profile is nowhere near ripe. To add some context here, Palantir currently trades at a price-to-earnings (P/E) multiple of 403 and a forward price-to-earnings ratio of 167. In either case, it’s simply not appropriate to measure Palantir using traditional earnings-based valuation methods.

PLTR PS Ratio Chart — PLTR PS ratio data of YCharts.

A final line of defense is to look at the PEG ratio. The PEG ratio can be useful because it accounts for earnings growth over several years. A general rule of thumb is that a PEG ratio above 1 signals that the stock may be overvalued. Right now, Palantir’s PEG ratio is 3.5.

By all accounts, Palantir is an expensive stock to own at its current valuation. Furthermore, the stock’s current valuation extension (as seen above) is not over, and momentum does not appear to be slowing.

While Palantir stock is undoubtedly expensive, I don’t see it as a stock to ignore. The company has done an impressive job of diversifying its business by penetrating the private sector while identifying creative ways to accelerate its government business through the power of strategic partnerships with major technology and other defense contractors.

I see Palantir as a company that will remain a leader in the AI revolution, so I think even better days are likely ahead for investors. I think the best strategy for an investment in Palantir is to dollar-cost average over a long-term time horizon, as well as looking to strengthen a position by taking advantage of sell-offs and valuations.

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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. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister of Meta Platform CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Adam Spatacco holds positions at Amazon, Meta Platforms, Microsoft and Palantir Technologies. The Motley Fool has positions in and recommends Amazon, CrowdStrike, Datadog, Meta Platforms, Microsoft, MongoDB, Oracle, Palantir Technologies, ServiceNow and Snowflake. 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 one disclosure policy.

Is the newest member of the Nasdaq-100 — a 764% gain since its IPO — a buy heading into 2025? was originally published by The Motley Fool