Palantir Technologies' (PLTR 0.13%) stock has been in crushing form on the market over the past year, rising by a stunning 482% as of this writing. Demand for the company's artificial intelligence (AI) software solutions has been growing at a healthy pace, leading to improvements in its revenue and earnings growth rates.
However, in the wake of that phenomenal surge in Palantir's stock price, investors may understandably wonder if the AI software specialist can sustain its momentum. After all, among the 28 analysts covering the stock, the average 12-month price target stands at $107, which points toward a 22.6% slide from current levels.
What's more, only 21% of those analysts recommend it as a buy, while 61% have a hold rating on the stock. Is this an indication that it is time for shareholders to sell Palantir stock and book their profits?
Image source: Getty Images.
Palantir Technologies' valuation may have gotten ahead of itself
Palantir stock has gone from expensive to extremely expensive. Its trailing price-to-earnings ratio of 574 and forward earnings multiple of 238 are far from value territory. By comparison, the tech-heavy Nasdaq-100 index -- a useful proxy for the tech sector broadly -- has an average earnings multiple of 30.
The company's sales multiple of 105 is also well above the U.S. technology sector's average of almost 8. The reason why Palantir is so expensive is that the company's sales and earnings growth, while respectable, have been overshadowed by its stock price surge, as the charts below make clear.
Data by YCharts.
This suggests that the market has been bidding up Palantir stock based on what investors see as its growth potential. The belief is that the company could become a big winner in an AI software market that's set for remarkable growth in the next few years. According to an estimate from research firm Market.Us, the AI software market will grow at an annualized rate of 32% through 2033, generating more than $2.5 trillion in annual revenue at the end of the forecast period.
The recent acceleration in Palantir's revenue growth suggests that it is well on its way to capturing a bigger share of this lucrative opportunity. But would that be enough for the stock to defy analyst sentiment and deliver more upside?
NASDAQ: PLTR
Key Data Points
Why this AI stock could continue heading higher in the coming year
Investors are buying Palantir stock hand over fist based on its growth potential. The good part is that the company's recent results make it clear that it could indeed deliver on that front.
Its revenue pipeline is growing at a faster pace than the company's actual revenue. This is evident from the 45% year-over-year increase in Palantir's remaining deal value (RDV) in the first quarter of 2025 to almost $6 billion. That exceeded the 39% growth in its actual revenue that quarter. This led management to raise its full-year revenue guidance to almost $3.9 billion, which would be an increase of 36% from 2024.
Moreover, the pace at which Palantir is signing new contracts suggests that it could further raise its guidance as the year progresses, and that could lead the market to bid the stock higher. After all, in Q1, Palantir's RDV jumped at double the pace of the prior-year period, and that was driven by a 66% year-over-year increase in total contract value booked by the company last quarter.
Palantir signed $1.5 billion worth of new contracts in Q1. In all, the rates of increase in Palantir's revenue, RDV, and contracts were well above the pace at which the AI software market is expected to grow. So, Palantir seems to be in a terrific position to continue crushing Wall Street's growth expectations.
At the same time, the company enjoys strong unit economics thanks to higher spending by its established customers. Palantir's customers tend to expand their deals with it after signing their initial contracts, leading to nice improvements in margins and healthy growth in earnings. This can be seen from the following chart.
Data by YCharts.
Not surprisingly, analysts have increased their earnings growth expectations for Palantir for the current year significantly, and there is a good chance for further increases based on the growth in its revenue pipeline and the size of the end market that it is targeting.
All this suggests that there may be more upside in store for Palantir stock in the coming year, as the company seems on track to deliver better-than-expected growth. However, those who don't already own this AI stock and are wary of buying in at such expensive valuations would do well to look out for any dips in the stock price that might present a more appealing entry point, as the massive size of the AI software market suggests that Palantir is in position to deliver long-term growth.
