Finding the next big AI stock to buy and hold is a great goal for investors, but knowing which stocks to avoid is key as well.
Famed investor Warren Buffett once said the first rule of investing is to never lose money. The second rule is don't forget rule number one. While losing money in investing is inevitable, it underscores that staying away from certain stocks is just as important as picking the right ones.
In the AI investing realm, there are several promising companies that trade for unreasonable valuations. These companies could continue growing at a rapid pace, but have so much growth baked into them that they end up being poor investments over the long term.
One stock that fits this description is Palantir (PLTR +0.69%), and I think it's one that investors should avoid at all costs.
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Palantir's business is rapidly growing
Palantir's artificial intelligence-powered data analytics software platform is seeing widespread adoption. At first, it was intended for government use only, but then it was expanded into the commercial sector. The company has seen strong growth in both business units as of late, but its original government business still accounts for the majority of revenue.
In Q3, government revenue rose by 55% year over year to $633 million, while commercial revenue increased 73% to $548 million. The strength of both divisions highlights how popular Palantir's platform is becoming, and it shows no signs of slowing down anytime soon.
NASDAQ: PLTR
Key Data Points
One of the biggest reasons for Palantir's rapid growth is its AIP product. This allows its clients to incorporate generative AI into workflows and deploy AI agents to automate tasks. That application for its products is nearly endless, as every company in every industry requires data analytics to some level. With only 530 clients in the U.S. commercial sector, the company's runway for growth seems massive.
However, not every company is Palantir's target audience, and sustaining its combined 63% growth rate will be difficult over the long term. For 2026, Wall Street analysts project 41% revenue growth, which is still an impressive figure. However, it will become increasingly difficult to grow over the next few years, as most companies that wanted to adopt an AI platform like Palantir likely have already done so. This is an issue because Palantir has already baked in multiple years of growth into its stock price.
Palantir's valuation far exceeds its business results
Palantir is one of the most expensive stocks on the market, trading for 109 times sales and 229 times forward earnings.
PLTR PS Ratio data by YCharts
That indicates multiple years of growth baked into the stock, and if Palantir's growth starts to slow, don't be surprised if the stock sells off to decrease its premium valuation.
If we project that Palantir delivers a 40% compound annual growth rate (CAGR) over the next five years, which is still bullish considering Wall Street expects 41% growth in 2026, that would indicate its revenue will total $14.9 billion. At its current 40% profit margin, that would give Palantir $6 billion in net income at the end of 2030.
Should Palantir trade for a still expensive valuation of 50 times earnings, that would give it a market cap of $300 billion. Considering Palantir's market cap is nearly $400 billion right now, this would result in Palantir's stock price going backward.
Most companies would see their stocks skyrocket if they grew revenue at a 40% CAGR over five years. However, that growth and then some are already factored into Palantir's stock price right now. This should be a major red flag for investors, and is the primary reason why I'm avoiding Palantir stock.
