For over two years, the bulls have been in complete control on Wall Street, with the ageless Dow Jones Industrial Average, widely followed S&P 500, and growth-dependent Nasdaq Composite all climbing to record-closing highs.
While catalysts have been aplenty, nothing has provided more of a lift to the stock market than the artificial intelligence (AI) revolution.
Empowering software and systems with AI, and giving them the capacity to reason, act, and evolve over time without the need for human intervention, is a game-changing leap forward for corporate America. It's precisely why the analysts at PwC foresee this technology adding $15.7 trillion to global gross domestic product by the turn of the decade.
Image source: Getty Images.
But when game-changing technologies arise, so does the potential for investors to grossly overvalue early stage adoption and utility.
Last year, I intimated on more than one occasion that semiconductor colossus Nvidia (NVDA +4.30%) might represent the biggest bubble stock on Wall Street. Shares of Nvidia recently retraced by more than 20% from its all-time high as concerns about DeepSeek have called into question the level of hardware needed to optimize the training of large language models.
While Nvidia stock is still pricey in many respects, it may have ceded the title of "Wall Street's biggest bubble stock" to AI-driven data-mining specialist Palantir Technologies (PLTR +1.10%), based on what history tells us.
Palantir's irreplaceability and competitive advantages have earned it a hearty valuation premium
Palantir is a tale of two businesses: Gotham and Foundry. The former is an AI-driven platform that helps federal governments collect data and assists military organizations with mission planning and execution. Meanwhile, the latter is an AI- and machine learning-fueled platform designed to help businesses better understand their data, with the goal of streamlining their operations.
For more than a decade, Gotham has been doing the heavy lifting for Palantir. The company is typically securing contracts that span four or five years and generate predictable cash flow from a government entity (i.e., there's no concern about not being paid). This is the segment that helped lift Palantir to recurring profitability well ahead of Wall Street's consensus forecast.
NASDAQ: PLTR
Key Data Points
Gotham is in a particularly ideal position given President Donald Trump's desire to protect America's AI interests and secure its intellectual property. In other words, the Trump administration's reshaping of the AI arena will more than likely result in a number of new contracts for Gotham.
In comparison, Foundry is growing like a weed, but is still in its very early stages of expansion. As of the end of 2024, Foundry's commercial customer count clocked in at 571, which represents a 52% increase from the prior-year period.
While other businesses might offer bits and pieces of the software-as-a-service (SaaS) solutions Palantir can provide, no other company comes close to providing these services at scale. This irreplaceability is what ensures Palantir's rock-solid operating cash flow and has earned the company quite the valuation premium.
Following the close of trading on Monday, Feb. 3, Palantir did what it does best: blow the doors of Wall Street's expectations. Fourth-quarter sales of $827.5 million (representing 36% year-over-year growth) handily surpassed the consensus estimate of $781.2 million. What's more, Palantir's 2025 full-year sales guide of $3.741 billion to $3.757 billion cruised past Wall Street's $3.53 billion forecast.
As of this writing in the late-evening hours of Feb. 3, shares of Palantir were trading hands at $102.79, which places its market cap in the neighborhood of $237 billion.
Image source: Getty Images.
History weighs in: Is Palantir Technologies Wall Street's biggest bubble stock in 2025?
There's no denying that Palantir has been the hottest AI stock on the planet over the trailing-two-year period. The all-important question is: Can its stock maintain a parabolic move higher?
Based on what history tells us, the clear answer is no, in two respects.
The first headwind Palantir is to encounter, per history, is a potential bubble-bursting event for AI stocks, as a whole. Every next-big-thing innovation and technology since (and including) the advent of the internet in the mid-1990s has navigated its way through a bubble-bursting event. Mind you, this isn't to say that AI and Palantir won't be wildly successful over the long run. Rather, it's to denote that investors consistently overestimate the early adoption and utility of potentially game-changing technologies.
If an AI bubble does form and bursts, companies with premium valuations that are on the cutting-edge of a next-big-thing trend tend to be hit the hardest. In Palantir's defense, the multiyear contracts it receives provide exceptional cash-flow transparency that may be able to buoy its shares better than direct AI players like Nvidia. Nevertheless, the early boom-bust cycle for next-big-thing innovations would be expected to weigh on Palantir's stock.
The other history-based concern for Palantir Technologies is the company's valuation, specifically pertaining to its price-to-sales (P/S) ratio.
PLTR PS Ratio data by YCharts. Palantir's TTM P/S ratio in this chart hasn't yet reflected its fourth-quarter report and is based on data through Sept. 30.
Looking back to the dot-com bubble a quarter century ago, leaders like Amazon and Cisco Systems peaked in the vicinity of a trailing-12-month (TTM) P/S ratio of 40. Interestingly enough, Nvidia may have also topped out at a P/S ratio of around 42 last summer.
Based on Palantir's TTM sales of $2.866 billion and its market cap in after-hour trading on Feb. 3, it's commanding an almost unheard-of P/S ratio of 83! In my more than 26 years of investing, I can't recall a higher P/S ratio from a market-leading business being sustained.
There are other worries, too, which extend beyond historic precedent. For example, a whopping 40% ($196.8 million) of Palantir's pre-tax income in 2024 derived from interest income on its growing cash pile. To be clear, I'm not faulting or penalizing Palantir for generating interest income on its cash with short-term Treasury yields above historic norms. Rather, I'm pointing to the company's valuation premium making even less sense when a substantial portion of its pre-tax profits are originating from an unsustainable and non-innovative source.
What's more, Palantir's stock-based compensation (SBC) has been climbing at a frighteningly fast pace and is outpacing net income. SBC totaled $691.6 million in 2024, up from $475.9 million in the previous year. Ongoing SBC has the potential to dilute existing shareholders and weigh on earnings per share.
While Palantir's operating model absolutely deserves some degree of premium valuation for its uniqueness and its consistent outpacing of analyst estimates, history is quite clear that all new innovations need to time mature (no exceptions!), and a P/S ratio of 83 isn't sustainable.
