Is Palantir’s stock in a bubble? History says yes.

There is plenty of evidence for that Palantir‘s (PLTR 1.25%) the stock is in a bubble. History is not on Palantir’s side, and many companies have traded around the high expectation its stock is currently trading at, and few (if any) have worked out well for investors.

So how can one of the most dominant AI software companies be in a bubble when business is booming? It’s simple: expectations outweigh reality.

Palantir’s business is succeeding, but it’s not the next Nvidia

To be clear, Palantir’s business is great and will continue to grow. That part is not up for debate. Palantir offers a premium AI software product that empowers its users to make the most informed decisions. This benefits governments that implement the software as well as commercial enterprises.

Its Artificial Intelligence Platform (AIP) product is also top notch. It allows users to integrate generative AI models into the inner workings of a business, rather than using them as a tool on the side.

But I draw the line at calling Palantir too Nvidia of the software world, as it is in too competitive a market to hold that title.

Nvidia is in a world of its own in terms of performance compared to its peers, so it became the only choice. Palantir has competition from many directions. It competes against other companies that have pre-built AI models, consulting firms that have the talent to build these models for their clients, and individual contributors that build these AI models for their own companies.

Although Palantir has been successful so far, the number of customers it can sign is quite limited. Palantir’s software is incredibly expensive, primarily because it is custom-built for each application. In the third quarter, Palantir had 321 US commercial customers, generating $179 million in revenue. If you calculate that turnover figure annually, you get an average turnover per customer of $2.23 million. This leaves out a lot of potential small and medium-sized customers and limits the maximum customer base that Palantir can reach.

This is not a knock on Palantir or its product; it’s just the reality that not every company will use Palantir, whereas something like an Nvidia GPU can be implemented by a large majority of companies in one way or another.

However, the stock trades like Palantir’s software will be used by everyone in every company worldwide.

Palantir is operating in a dangerous zone

In the third quarter, Palantir’s revenue grew 30% year over year. While that’s strong growth, it’s not nearly enough to justify the share price.

Let’s take a look at another high-flyer that everyone would use forever: Zoom video. Back in the pandemic years, Zoom saw rapid adoption as everyone geared up to work from home. There were predictions that no one would return to the office and Zoom would be the new way of doing business. Zoom’s revenue grew rapidly and so did its stock valuation.

ZM Operating earnings (quarterly annual growth) data of YCharts

Zoom’s revenue quadrupled year over year for a few quarters, but even when revenue doubled, the stock traded at about 40 to 60 times sales. With the boom over, Zoom’s stock price collapsed and is now only 15% above where it entered 2020.

Palantir hasn’t shown nearly as much growth, yet the stock trades at a lofty 57 times sales.

PLTR Operating Earnings (Quarterly Annual Growth) data of YCharts

This isn’t the first time Palantir has traded around this level, but the last time it did, revenue grew much faster.

As another point of comparison, Nvidia never traded for more than 45 times sales, even when its revenue tripled year over year.

Palantir’s stock appears to be in a bubble, and investors should be cautious. The problem is that the bubbles could go much higher before they burst, and Palantir’s stock could continue to rise. Unless Palantir starts doubling or tripling its revenue year over year and maintains that for a few years, this valuation doesn’t make sense.

The company will likely continue to grow and succeed, but over the long term, I doubt the stock will. There are far too many great, reasonably priced companies in the market that offer greater long-term return potential, and I’d look there (or shift profits from Palantir there) before investing in this massively bearish stock.