There is no shortage of popular artificial intelligence (AI) stocks. The AI investment theme has boosted many stocks, including energy companies, construction businesses, computing hardware providers, and software companies. Few have been as successful as Palantir (PLTR +1.25%). Palantir's stock has had an incredible run since 2023 started, as the stock has risen by around 2,700%.
However, I think Palantir's run could be over.
While Palantir's business has rapidly expanded thanks to its incredible AI software offering, its stock has risen at an even faster pace. This has caused Palantir's stock to become grossly overvalued, and I think it could be due for a serious correction in 2026.
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Palantir's business is excelling
One distinction I want to make: Palantir's software business is absolutely incredible and is a leader in its field. Primarily, Palantir's software is used as an artificial intelligence-powered data analytics platform. Originally intended for government use cases, Palantir's software eventually found a use case in the commercial sector. With two growth paths, Palantir has thrived during the AI build-out.
Regardless of which business division you look at, Palantir is growing rapidly. In the third quarter, Palantir's commercial revenue rose 73% year over year to $548 million, and its government revenue increased 55% to $633 million. Palantir has to be doing something right to deliver that level of growth in both sectors, and it still has a fairly large market to conquer. In the U.S., it only has 530 commercial customers. Countless businesses could deploy Palantir's software, giving it a huge growth runway in that market.
NASDAQ: PLTR
Key Data Points
Another area where Palantir has lagged is international commerce. This has less to do with Palantir's strategy and more to do with key locations, like Europe, and the slow pace of AI adoption. There's no guarantee that this will change anytime soon, but it could represent another growth area for Palantir.
In Q3, U.S. commercial revenue increased 121% year over year to $397 million, adding $218 million of revenue over last year's total. Commercial revenue as a whole added $231 million, so nearly all of Palantir's growth is located in the U.S. Should something happen to the U.S. sector, Palantir's growth case would be in trouble, but I don't foresee anything slowing AI adoption in the U.S.
Palantir's business is excelling and constantly adding new clients. However, its stock has gotten so expensive that Palantir's impressive growth must continue to justify its valuation.
Few stocks are as expensive as Palantir
Palantir trades for unbelievable valuation levels.
PLTR PS Ratio data by YCharts
At 119 times sales and 251 times forward earnings, Palantir is among the most expensive stocks in the market. It's rare to see any stock trade above 100 times sales, but if you do, those stocks are usually doubling or tripling their revenue year over year each quarter. Palantir's overall growth rate was 63%, so it falls well short of that threshold.
A reasonably valued company that's growing as fast as Palantir trades for about 40 times forward earnings, such as Nvidia (Nvidia grew revenue at a 62% pace during its last quarter).
If Palantir can sustain a 60% compound annual growth rate (CAGR), maintain its 40% profit margin, and trade at 40 times forward earnings, it would require more than three years of growth to reach a reasonable valuation level like where Nvidia trades currently. The problem is, Palantir's growth rate is expected to slow in 2026. Wall Street analysts expect a 41% revenue growth rate next year. If Palantir's growth rate slows, it increases the number of growth years required to bring its valuation to a reasonable level.
This is a huge problem for Palantir, and if the company starts reporting slowing growth, the stock could come tumbling down. I think that could happen in 2026, and investors need to be cautious around Palantir's stock.
