Palantir's Stock Just Did Something It Hasn't Done Since 2021

Palantir (NYSE: PLTR) has been one of the hottest artificial intelligence (AI) stocks to own this year. It's up around 280% as of the time of this writing and has far exceeded many investors' expectations.

However, this run-up hasn't entirely come from its business booming, as the price investors are willing to pay for its performance has surged alongside its stock price. This has caused the stock to do something it hasn't done since 2021, and investors need to pay attention to it.

Palantir's product is seeing huge demand

Palantir's AI software has become a massive hit, as the company has years of expertise in this space that its competition doesn't have. Palantir's platform started off tailored for government use, allowing the software to take in massive amounts of information, process it quickly, and then give insights as to which actions to take next.

This general concept is also useful for commercial businesses, so Palantir eventually expanded to this side. As of the third quarter, the government business is still larger than the commercial side, but it's starting to become a fairly even split, with government revenue making up 56% of the total.

The latest surge in AI demand has massively benefited Palantir, as more clients are looking for ways to integrate AI into their daily operations. This has a twofold effect for its customers. First, Palantir can automate some of the repetitive tasks that an employee may manually do. Second, the employees making decisions based on this information can be better informed because it gets to them in real-time.

All of this has caused Palantir's product revenue to soar, rising 30% year over year to $726 million. The U.S., in particular, is seeing more demand than the international side. U.S. commercial revenue rose 54% year over year to $179 million, and U.S. government revenue rose 40% year over year to $320 million.

International sales are a big deal for Palantir, as they make up about a third of sales. While this part of the business isn't necessarily "weak," it just hasn't seen the AI race that the U.S. has. Once the international client base starts to get the same AI fever as the U.S., Palantir's growth could accelerate even more.

You may be tempted to place a significant bet on Palantir's stock with just that information. However, what Palantir has recently done for the first time since 2021 isn't good, and it could end in disaster for Palantir investors.

The stock has gotten incredibly expensive

With Palantir's stock price rising 280% this year, yet revenue only rising around 30%, there's a clear disconnect between business growth and stock growth. Investors are now willing to pay more for Palantir's business, which has caused its valuation to surge.

From a price-to-sales (P/S) standpoint, Palantir now trades for nearly 60 times sales.

PLTR PS Ratio data by YCharts

The last time Palantir traded that high was in 2021, and the stock didn't do well until over two years later. When Palantir reached its peak valuation in February 2021, the stock tumbled around 80% from its all-time highs.

It had nothing to do with the business, as revenue kept growing during that time frame.

PLTR Operating Revenue (Quarterly YoY Growth) data by YCharts

This brings up an important reality for investors: Even though Palantir's business is growing, the stock price can still drop.

Few companies have ever traded for 50 times sales and been a winning investment. That level of expectation is so high that only companies doubling or tripling their revenue year over year can justify it. Palantir's revenue growth is only in the 30% range. While that's not slow growth by any means, it's far less than Nvidia saw during its major run.

Even though Nvidia has been tripling its revenue year over year for multiple quarters in a row, it has never traded for more than 45 times sales.

PLTR PS Ratio data by YCharts

Yet, Palantir, which is growing much slower, has.

This doesn't add up, and investors who own Palantir stock need to be careful. History may not repeat itself, but it does often rhyme. Palantir is a very expensive stock that isn't putting up the results it needs to justify its valuation. Unless revenue starts doubling or tripling in the near future, it's possible the company's bubble could burst.

It may be months from now or even a year from now, but if Palantir keeps up its standard growth rates at its current valuation, the results won't be pretty, and investors could be sitting on a loss like they were during 2021 and 2022.

So, what should investors do? I don't think you need to sell every share of Palantir if you think it can go higher, but at least take some profits off the table. That way, you'll still have captured some gains from this latest run.

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Keithen Drury has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.