Palantir Technologies (NASDAQ: PLTR) has taken the market by storm in 2024.
Share prices of the artificial intelligence (AI)-focused data fusion specialist are up 332% year-to-date through Dec. 19. The stock soared as its revenue growth accelerated over the last five quarters and its profit margins expanded significantly.
In the last year or two, Palantir went from a speculative cloud stock to a viable and growing business. It also benefited from gaining entry to the S&P 500 and soared since the November presidential election as investors seem to think it will benefit from increased spending by the Trump administration on areas like national security and immigration enforcement. The federal government is Palantir's biggest customer, and the company got its start serving counterterrorist agencies and helping them connect the dots in disparate pieces of data.
While Palantir's surge this year is certainly impressive, the stock's valuation seems to have become detached from the underlying business.
The chart below shows the company's price-to-sales ratio, which has soared to an astronomical 67.5.
As you can see, the company's price-to-sales ratio has nearly quadrupled over the last year. The P/S ratio isn't a perfect measure of valuation, but 67.5 is off-the-charts high. A P/S of 20 is typically considered expensive, even in an industry like software where stocks tend to earn high valuations.
If Palantir had huge profit margins like Nvidia, the P/S valuation wouldn't be as alarming as it is. Currently, its P/E ratio is close to 400, so high to be nearly meaningless. Palantir would have to grow its profits by 10x without a change in the stock price to have a P/E valuation in line with big tech stocks like the "Magnificent Seven."
Palantir got attention from investors for its AI platform and its broader potential in AI, but the company's business model is software-as-a-service, and it's already one of the most valuable in that sector.
The table below shows the top five SaaS companies by market cap.
Source: Yahoo! Finance as of Dec. 19
As you can see, Palantir wouldn't have to grow much more to become the No. 3 or even No. 2 biggest SaaS stock. Salesforce's market cap isn't necessarily a ceiling on the size of any SaaS stock, but it does offer an indication of the limitations of a cloud software company. Based on the sector leaders, it would seem unreasonable for Palantir's market cap to triple from here, at least without significant growth among its peers.