Palantir Technologies (PLTR +1.60%) stock had another stellar year in 2025, jumping by an impressive 149%. The market has rewarded the artificial intelligence (AI) software specialist handsomely for its growing influence in its space, but Wall Street analysts' sentiments suggest that the stock may not have much more room to run in the near future.
The median 12-month price target of $200 would amount to a gain of just 6% from current levels. Moreover, only about a quarter of the 27 analysts covering Palantir rate it a buy, while two-thirds rate it a hold.
Does this mean investors shouldn't be buying Palantir stock in the new year?
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Palantir needs to justify its lofty valuation
The surge in Palantir stock in the past couple of years has lifted it to some extremely expensive valuations. It's trading at 435 times trailing earnings, a massive premium when compared to the U.S. tech sector's average earnings multiple of 45. Its forward earnings multiple of 188 is significantly lower than its trailing multiple -- reflecting its expected bottom-line growth -- but it's still expensive.
NASDAQ: PLTR
Key Data Points
Those premiums, however, are justifiable considering its strong unit economics. The company's ability to land new customers at a healthy pace and win more business from its established customers has helped it achieve solid profitability. In the third quarter, its adjusted operating margin shot up by an impressive 13 percentage points year over year to 51%.
Another key metric worth paying attention to here is the Rule of 40, a metric that is calculated by adding a company's revenue growth rate to its adjusted operating margin. For software companies, a result of more than 40% (hence the name) is viewed to mean the company is "investable."
Palantir reported a 63% increase in revenue in Q3. Add that to its adjusted operating margin of 51% and you get a Rule of 40 score of 114%. This metric has been expanding at a solid clip over the past couple of years, growing from just 54% in the Q4 2023 to last quarter's record levels.
Management notes that its Rule of 40 score ranks second among the top 25 companies globally, behind only Nvidia. It's also the top enterprise software company with more than $1 billion in trailing-12-month revenue by that metric.
All this suggests that Palantir's premium valuation is indeed justifiable, especially considering that its Rule of 40 score is likely to rise. That's because Palantir's overall customer count increased by 45% year over year in Q3. Given that the company's customers tend to expand their deployments of its Artificial Intelligence Platform (AIP) following their initial contracts, it is likely to get more business from those new clients.
Palantir landed $2.8 billion worth of new contracts in Q3, up by 151% from the year-ago period. That was well above the revenue growth clocked by the company in Q2, suggesting that it now has a much stronger revenue pipeline that will translate into bigger increases in its top and bottom lines in future quarters. Additionally, it is emerging as the go-to choice for governments and enterprises seeking to deploy AI tools, and its revenues are growing at a faster pace than the AI software market's annual growth pace of 24%.
According to one estimate, the global AI software market could generate nearly $400 billion in revenue in 2030, as compared to an estimated $126 billion in 2025. That would equate to an annualized growth rate of 25%. The pace at which Palantir is landing new contracts and attracting new customers suggests that it is on track to capture a nice chunk of this opportunity, which may result in more stock upside despite its high valuation.
What should investors do?
Anyone who wants to buy Palantir's stock now to take advantage of that incredible expected growth will have to pay a massive premium. However, the points discussed suggest that the company has the ability to maintain its stunning growth rate for a long time to come.
For example, in Q3, Palantir's earnings jumped by 110% year over year to $0.21 per share, crushing Wall Street's estimate of $0.17 per share. Importantly, there's still room for improvement in the company's margins and revenues, considering the lucrative opportunity in the generative AI software market. As a result, Palantir's Rule of 40 score, which is already among the highest in the world, is likely to continue improving.
Analysts forecast a 40% increase in its earnings in the new year, a figure it could easily exceed because of its healthy revenue pipeline and new customer additions that can boost its margins.
If that's indeed the case, Palantir stock could continue soaring in 2026, which is why those looking to add another growth stock to their portfolios can still consider accumulating its shares.
