Palantir Technologies (NASDAQ: PLTR) has been one of the biggest winners of the AI era. The cloud software stock is up a remarkable 2,910% since the start of 2023, turning $1,000 into more than $30,000.
The stock’s emergence is no accident. Its launch of its artificial intelligence platform (AIP) in 2023 transformed the business. Its revenue growth rate has dramatically accelerated since then, and its profit margin has expanded significantly as well.
The company has also benefited from the embrace of the Trump administration, which has adopted Palantir’s tools across agencies, and it’s gained significant traction with U.S. commercial businesses. In the third quarter, U.S. commercial revenue jumped 121% to $397 million, and U.S. government revenue rose $486 million, driving the growth in the business as overall revenue rose 63% to $1.18 billion.
While its growth is strong, investor skepticism about its valuation seems to be on the rise. Palantir currently trades at a sky-high price-to-sales ratio of 121. By comparison, the next most expensive stock on the S&P 500 trades at a P/S ratio of 44.2, which would still be considered dangerously pricey.
However, earnings are what ultimately count, and Palantir has become a high-margin business with a generally accepted accounting principles (GAAP) operating margin of 33% and a net income margin of 40% in the most recent quarter, thanks to $59.7 million in interest income and $27.5 million in other income from unrealized equity gains. Based on GAAP earnings, Palantir has a trailing price-to-earnings ratio of 428.
So where will Palantir be in another year? The answer to that question will depend primarily on two things: the strength of Palantir’s own business and sentiment around AI. Let’s take a look at how both of those factors will affect the stock.
Heading into 2026, Palantir’s momentum is continuing to build. The company just reported its fastest quarterly revenue growth ever as a publicly traded company at 63%, and it expects another strong result in the fourth quarter, calling for $1.327 billion-$1.331 billion, or 50% at the midpoint. However, the company has a pattern of topping its guidance, so it could easily beat that mark. Whether Palantir’s growth can keep accelerating remains to be seen, but it doesn’t need to do that in order for the business to be successful.
Palantir faces little direct competition. The company says its biggest competitor is homegrown initiatives from its customers. Additionally, as a cloud software stock, Palantir enjoys some protection from the consumer headwinds that are rattling parts of the stock market, as the businesses buying its product are likely to do so as long as it continues to deliver the efficiencies it’s known for. The company has also built up an impressive backlog, which should convert into revenue no matter what happens with the economy or new business. It now has $3.63 billion U.S. commercial remaining deal value, or roughly two years of revenue from that segment at current run rates.
Finally, the company should also continue to benefit from the Trump administration’s support and the work of initiatives like DOGE, which have relied on Palantir’s technology.
Image source: Getty Images.
However, it’s not just financial results that have driven Palantir’s growth. The stock has also benefited from significant multiple expansion over the last three years due to enthusiasm around AI.
That tailwind may be fading, though. In recent months, concerns about an AI bubble have weighed on Palantir, and the stock has traded sideways over the last few months.
As a software stock, the company is distinct from the chipmakers like Nvidia that are driving the AI boom, or the infrastructure stocks like Oracle that have also benefited from AI. Its business model should help protect it from sentiment around AI to a degree, but its valuation is so high that it might not get that benefit.
If there are more signs in the market that the pace of growth in AI is unsustainable or that there is even a bubble, Palantir is likely to suffer, and the stock could easily fall 50% or more if investor sentiment shifts. However, the bubble concerns could also prove to be passing, meaning the AI sector could keep moving higher next year.
Looking out to the next year, Palantir is poised for solid growth, but the valuation is likely to restrain the stock, and any expansion in the valuation only adds risk. At the current price-to-sales ratio, the upside potential is limited. If the AI boom continues, Palantir’s stock growth should be similar to the Nasdaq Composite or slightly better.
Alternatively, if AI sentiment begins to crack, the stock could fall sharply. At this point, the downside risk in the stock seems to outweigh the upside potential.
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Jeremy Bowman has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia, Oracle, and Palantir Technologies. The Motley Fool has a disclosure policy.
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