Shares of Palantir Technologies (PLTR 1.42%) have soared on AI enthusiasm, but its sky-high valuations have some investors nervous. The data analytics company has real strengths -- a unique business model and loyal customers -- but its stock is priced for perfection. Will it crash in 2026?
Palantir's hands-on approach locks in customers
Palantir builds AI-powered software platforms that help clients integrate and make sense of massive amounts of unstructured data scattered across their organizations. This allows decision-makers to make key connections, run complex analyses, and build more efficient systems more quickly and effectively.
But the company's advantage isn't just its cutting-edge technology; it's how it tailors that technology to each client's specific needs. This approach not only creates real value but also keeps customers paying.
NASDAQ: PLTR
Key Data Points
Several studies on AI's economic impact in the workplace have shown disappointing results -- especially given the scale of investment and buy-in from corporate leadership. But those studies consistently point to implementation problems rather than issues with the technology itself. Palantir's hands-on approach is designed to avoid this exact pitfall.
The company says it uses "forward-deployed engineers" (FDEs) who are embedded directly with clients. These FDEs start by gaining a deep understanding of a user's internal operations and challenges, then work alongside client teams to mold solutions to their exact needs. This requires more up-front investment, but it means clients aren't left scratching their heads, wondering how exactly the new AI tools are supposed to help.
And beyond delivering value, this model gives the company a durable competitive moat by locking in clients. All that up-front investment of time and resources would have to be repeated with a competitor, or the client would have to build its own systems -- no easy task.
There's a psychological component, too: The company -- which got its start as a military contractor -- purposefully uses military lingo (even calling its FDEs "Deltas") to cultivate camaraderie and a sense that the client and engineers are fighting side by side.
You might expect this individualized approach to eat into margins, but it actually helps keep costs down. Despite sending in teams of engineers, Palantir's specialized solutions make it efficient, and over the last 12 months, it reported impressive gross margins of 80%.
Government contracts bring revenue but also political risk
A significant portion of revenue comes from government contracts -- about 55% as of the last few quarters. While success with the federal government is an asset, it also presents risks.
U.S. federal spending priorities can change significantly from administration to administration, affecting any government contractor's business. So it's notable that Palantir, whose government contracts include the Department of Homeland Security and support for immigration enforcement, is becoming a controversial name. While the current administration continues to add to Palantir's portfolio, future administrations may be more sensitive to public pushback.
Given Palantir's growth and apparent customer satisfaction, it would be easy to dismiss these risks or the possibility of a broader AI market slowdown. But the stock is priced for perfection: It trades at such an extreme multiple that it would need to deliver flawless growth for many years to justify its current valuation.
Image source: Getty Images.
An extreme valuation leaves little room for error
Much has been said about the stock's valuation, and it's easy for investors to wave this away. But even after its recent 30% decline, an enormous amount of growth is already baked into the stock.
Palantir trades at roughly 170 times forward earnings and nearly 75 times forward sales -- extreme multiples by any measure. Even its price/earnings-to-growth ratio (PEG) is extreme. This metric accounts for a company's high growth rate, and a PEG under 1 is generally considered attractive; anything over 1.5 raises questions. Palantir's PEG is 2.8.
Will the stock crash in 2026? It's impossible to say for sure, but I think there's a good chance it will see a major correction. With warning signs flashing across the broader economy and the AI market vulnerable to a slowdown, Palantir Technologies' shares face a real risk of falling back to earth in the next year.
