Palantir Technologies: 3 Motley Fool Contributors Weigh In

A stock in bubble territory

Will Healy: Saying a stock is in a "bubble" when the price is near its peak seems premature at best. Investors tend to identify bubbles after the fact, as was the case with Japan's Nikkei stock index in the 1980s and Cisco Systems in 2000.

Although investors may not feel ready to say Palantir is in a bubble just yet, the company appears pricey when measured by the most common valuation metrics.

As of now, its price-to-earnings ratio (P/E) is around 514, and comparing it to its forward P/E of 241 indicates rapid growth and a stock price that is far ahead of fundamentals.

Its price-to-sales ratio (P/S) of 114 appears to confirm this, especially considering that the average P/S for the S&P 500 is 3.2. That sales multiple is so high that Palantir stock would arguably still be expensive at one-tenth of its current price.

Investors need to compare that valuation against what the company offers. AIP allowed one insurer to reduce a two-week workflow to three hours. It also helped one client achieve more in one day than a hyperscaler had in four months. Given those productivity gains, it is natural that investors would bid up the stock price.

Unfortunately, valuation matters at some point, and a "valuation doesn't matter" attitude could trap even the longest-term investors.

Going back to the Nikkei, it peaked in December 1989 and would not reach its record high again until February 2024. Investors should also note that Cisco stock is 17% below its peak price in March 2000. Very few investors can afford to wait out such events.

Ultimately, it is natural for them to want to capitalize on Palantir's AI-driven productivity gains. Still, a 514 P/E likely puts it in bubble territory, and with valuations years ahead of its fundamentals, investors should probably consider selling.

Uncertainty always surrounds companies on the cutting edge

Jake Lerch: For me, the big reason Palantir stock has taken a hit in recent weeks is clear: It's all down to uncertainty. There is -- and has been -- a tremendous amount of uncertainty surrounding the stock for years.

How big is its total addressable market? How profitable can the company be in the long term? How quickly will its revenue grow?

For the most part, these questions exist for every public company. However, since Palantir operates on the cutting edge of AI, and its stock has skyrocketed in recent years, it's easy for bears to claim that its stock -- and the AI sector more broadly -- is just a big bubble ready to pop.

I'd push back on that for two reasons. First, let's remember that Palantir is highly volatile. Enduring this volatility is part of the process. The stock has experienced seven declines of at least 15% (from all-time highs) in just the last three years. Nevertheless, over that period, it's up nearly 2,000%. In other words, long-term investors need to be comfortable with frequent drops.

Second, the "AI is the new dot-com bubble" comparisons are once again popping up. Granted, stock valuations are high across the board right now, and particularly within the AI sector. Palantir, for example, has a P/S of 114. That's extremely high, but it doesn't convince me that AI is a bubble. Here's why.

Many of the companies in the run-up to the dot-com bubble lacked profits -- some even lacked meaningful revenue. In turn, when market sentiment turned south, these companies had nothing to fall back on. Palantir, on the other hand, has generated $3.4 billion in revenue, $1.7 billion in net income, and nearly $800 million in free cash flow over the last 12 months.

In summary, Palantir's stock might be pricey; it may even be destined to drop further. However, it -- and the AI sector -- are no mirage. Therefore, long-term investors shouldn't allow the recent volatility to shake their confidence.

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Jake Lerch has the following options: long September 2025 $155 calls on Palantir Technologies and long September 2025 $155 puts on Palantir Technologies. Justin Pope has no position in any of the stocks mentioned. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cisco Systems and Palantir Technologies. The Motley Fool has a disclosure policy.

Palantir Technologies: 3 Motley Fool Contributors Weigh In was originally published by The Motley Fool