Where Will Palantir Stock Be in 5 Years?

Key Points

• Palantir's market-beating performance has once again made it a hot stock to own in the artificial intelligence (AI) realm.

• While it's tempting to chase this momentum, historical patterns suggest that Palantir's valuation is on the verge of bubble territory.

• As investors witnessed during the peak days of COVID-19 and the dot-com boom during the 1990s, bubble stocks tend to experience significant compression in their valuation multiples over time.

• 10 stocks we like better than Palantir Technologies ›

When it comes to artificial intelligence (AI) stocks, Palantir Technologies (NASDAQ: PLTR) might just be the hottest name out there. As of the closing bell on July 8, shares of Palantir have gained 85% on the year. That's better than each member of the "Magnificent Seven" by a considerable margin. As I write this, Palantir is the top-performing stock in the S&P 500 and Nasdaq-100 index so far this year.

With a market capitalization of $330 billion, Palantir is currently the sixth-most valuable software company in the world. That's more than Salesforce, ServiceNow, Adobe, and IBM.

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While chasing a hot opportunity can be tempting, smart investors understand the risks of investing in momentum stocks. Let's take a detailed look at Palantir's valuation to help determine if the company's skyrocketing stock price is justified. Could Palantir stock be headed for even further gains?

Palantir's valuation continues to stretch higher and higher, and...

While the AI revolution does not have a specific starting date, I tend to use Nov. 30, 2022, as my reference point. This is the day that OpenAI released ChatGPT commercially.

Since then, Palantir's market value has soared by more than 2,000%. To put that into perspective, that is more than double Nvidia's gains over the same time period.

PLTR Market Cap data by YCharts

... history suggests a correction is coming

Sometimes, the excitement surrounding new opportunities can reach a fever pitch -- ultimately leading to overstretched valuations and abnormally pricey stocks. This phenomenon is generally referred to as a stock market bubble.

PLTR PS Ratio data by YCharts

The chart illustrates trends in the price-to-sales (P/S) ratio for some of the most popular stocks that gave rise to two of the technology landscape's most memorable bubbles.

During the peak of the COVID-19 pandemic, investors were convinced that Zoom Communications, Wayfair, and Peloton would become the default means of communication, home decoration, and fitness, as remote work and social distancing protocols became part of the daily routine. In addition, during the late 1990s, companies such as Cisco, Microsoft, and Amazon were paving the way for widespread internet adoption.

Right now, Palantir's P/S multiple of 112 trails only Zoom's peak levels during the height of the pandemic.

While I am not saying that AI itself is a bubble, I do think it's fair to say that Palantir's valuation is now well into bubble-like territory. As these trends make clear, eventually the bubble burst, and valuation multiples normalized considerably over the years.

Image source: Getty Images.

Where will Palantir stock be by 2030?

Although AI should continue being a transformative catalyst for the data mining company, Palantir's current valuation trends appear unsustainable. I think these dynamics have played a part in rising institutional selling of Palantir stock as of late -- particularly from well-known personalities on Wall Street such as Cathie Wood and Stanley Druckenmiller.

Over time, more investors will likely realize that the rise in Palantir stock is misaligned with the company's actual underlying growth. While I can't say for certain what the exact price Palantir will be trading at five years from now, history offers a compelling case that valuation compression is on the horizon. For these reasons, I think that in five years, there is a good chance that Palantir's market capitalization is considerably lower than where it is today.

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Suzanne Frey, an executive at Alphabet, 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 to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Palantir Technologies, and Tesla. The Motley Fool has positions in and recommends Adobe, Alphabet, Amazon, Apple, Cisco Systems, International Business Machines, Meta Platforms, Microsoft, Nvidia, Palantir Technologies, Peloton Interactive, Salesforce, ServiceNow, Tesla, and Zoom Communications. The Motley Fool recommends Wayfair and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.