One of the most difficult stocks in the market to understand is Palantir (PLTR +1.25%). Palantir continues to post unbelievable quarter after unbelievable quarter, and the stock continues to rise as a result. However, if you look at the valuation behind the stock, it makes no sense. Palantir is an incredibly difficult stock for me to wrap my head around, which is why I'm not investing in it.
Many investors want to own Palantir shares, but they must understand the risks and upside to the stock before doing so, as it could be a perilous investment if they don't.
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Palantir's product is top of the line
Palantir's artificial intelligence (AI)-powered software helps users make real-time decisions with the most up-to-date information possible. Originally, Palantir developed its own software to cater to government clients, but eventually expanded its usage to the commercial side. While government revenue makes up the majority of Palantir's total ($730 million in fourth-quarter government revenue versus $677 million in commercial revenue), commercial is growing faster, rising 82% versus the government's 60% rise.
NASDAQ: PLTR
Key Data Points
There isn't a lot to nitpick there; Palantir's revenue growth from both sectors is fantastic. Furthermore, Palantir isn't your run-of-the-mill software company that's sacrificing growth for profitability. In Q4 2025, Palantir generated a 43% profit margin. That ranks among the best software companies in the world, so there's nothing to complain about here either.
Palantir has one of the fastest-growing products on the planet, along with incredible profitability and a healthy customer mix. That's a fantastic business that I'm a massive fan of.
But why won't I touch the stock with a 10-foot pole?
Palantir's stock is very expensive
Investors are well aware of Palantir's success and they have assigned the stock a premium valuation as a result. Palantir's stock trades for 80 times sales, making it one of the most expensive stocks on the market.
PLTR PS Ratio data by YCharts
However, because Palantir is fully profitable, using the price-to-sales ratio is less effective than assessing the stock using earnings. Because Palantir is growing so rapidly, valuing the stock using forward earnings is a more appropriate measure. By this metric, the stock is still very expensive.
PLTR PE Ratio (Forward) data by YCharts
There are several years' worth of rapid growth baked into these valuations. Unless Palantir can deliver the same growth rates it projected for Q4 for multiple years, the valuations don't make sense. But if it can, then Palantir's stock could be well worth buying at these levels. While I'm bullish on Palantir's future, I'm not bullish enough to consider buying it at these prices. That may be a mistake, but I overpaid for many stocks years ago, and that lesson still resonates with Palantir stock today.
