The sell-off in the software space has been brutal this year. In fact, few software-as-a-service (SaaS) stocks have been spared, not even Palantir Technologies (PLTR +1.40%), which had been one of the hottest stocks over the past three years.
With Palantir stock down about 20% on the year, as of this writing, the question is whether Palantir is a buy, sell, or hold moving forward.
NASDAQ: PLTR
Key Data Points
The buy case
Palantir has become an integral part of the artificial intelligence (AI) landscape, as its platform helps make large language models (LLMs) more useful for business applications. Its platform essentially acts as an AI orchestration layer, gathering data from a variety of sources and then organizing it into an ontology that it links to real-world assets and processes. This significantly reduces AI hallucinations and allows third-party LLMs to solve mission-critical problems using a clean set of structured data.
The solution has been a huge hit with U.S. commercial customers. It's adding new customers quickly, while existing customers are rapidly expanding. This has helped the company achieve 10 straight quarters of revenue growth acceleration. Last quarter, its revenue surged a whopping 70%, while its U.S. commercial revenue skyrocketed 137%.
Given that its AI platform (AIP) can help solve a wide breadth of problems across industries, the company has significant growth still ahead of it.
The sell case
Even after its pullback to start the year, Palantir's stock is still not cheap. It trades at a forward price-to-sales (P/S) ratio of 45 times 2026 analyst estimates and a forward price-to-earnings (P/E) multiple of more than 100 times.
Meanwhile, the company remains tied to its largest customer, the U.S. government, which accounts for more than a third of its revenue. While Palantir is benefiting from the government's current modernization efforts in the military and intelligence agencies, being a government contractor can be a lumpy business. Different administrations also have different priorities, which could impact growth.
At the same time, Palantir likely isn't completely immune to AI disruption itself. It's not an AI-native company, so there's a risk that a competitor built from the ground up could create a more eloquent solution. If growth slows for any reason, Palantir's valuation multiple could collapse, and the stock with it.
Image source: Getty Images.
The verdict
At this point, I think Palantir has the potential to become one of the largest companies in the world -- eventually. However, even the largest companies in the world today -- Nvidia, Alphabet, Apple, Microsoft, and Amazon -- have all experienced huge drawdowns along the way to where they are today.
If I owned the stock, I'd continue to hold it for the long term, but given its valuation, I still wouldn't chase it here. Instead, I'd prefer to be a buyer below $110, where its valuation becomes a bit more reasonable at around 25 times 2027 revenue estimates.
