Palantir Technologies stock (NASDAQ: PLTR) has been on a tear this year, posting another surge over the past week. The stock has climbed more than 18% in just five trading days and has jumped close to 2.5x since early January and now trades above $185 per share. After such a rapid ascent, should investors holding sizable gains cash out? While the timing and scale of any pullback are impossible to predict, it’s worth examining the forces behind the rally and the risks to Palantir stock.
This photograph hsow the logo of the US big data analytics software company Palantir Technologies during the World Economic Forum (WEF) annual meeting in Davos, on January 23, 2025. (Photo by Fabrice COFFRINI / AFP) (Photo by FABRICE COFFRINI/AFP via Getty Images)
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What Has Driven The Rally?
Palantir has been executing well. In the most recent quarter, Palantir revenue growth accelerated to 48% year-over-year, up from 27% a year earlier, while adjusted operating margins expanded to 48% from 37%. That mix of not just faster growth but also rising profitability along with Palantir’s AI narrative has been appealing for investors. The generative AI boom has served as a strong tailwind, with Palantir positioning itself as a go-to provider for governments and enterprises looking to deploy AI software at scale. The U.S. government segment delivered standout performance, with revenue up 53% to $426 million last quarter, buoyed by a post-election environment that’s keeping defense and intelligence budgets robust under the new Trump administration. Investor enthusiasm has been further fueled by a beat-and-raise Q2, with revenue topping $1 billion and full-year guidance lifted to $4.14 to $4.15 billion, up from $3.89 to $3.90 billion.
Sky-high valuation
Palantir trades at roughly 290x forward earnings and 105x FY’25 revenue, levels that look stretched even with growth accelerating. Consensus estimates call for revenue to rise by about 45% this year, but that still leaves the stock far more expensive than peers. For comparison, SaaS interface design player Figma, which went public last week and is expected to post similar growth, trades at about 35x forward earnings. See Buy Or Fear Figma Stock? Cloud data warehousing major Snowflake trades at roughly 15x forward revenue and is on track for 25% revenue growth this year. High-multiple growth stocks often falter during economic slowdowns as earnings growth moderates and valuation multiples contract sharply.
Palantir also has a history of sharp drawdowns. Palantir lost over 70% of its value in 2022 falling from $18.53 in January to $6.00 by December while the S&P 500 declined about 25% over the same period. This kind of volatility isn’t just a footnote in Palantir’s history; it’s a feature of how the stock trades. There’s a real possibility that this could happen yet again. The tech indices are trading at all-time highs, driven by the AI trend but macroeconomic headwinds remain – from persistent inflation and weakening job data to hefty import tariffs on major trade partners. With the stock now considerably highly valued, even a minor miss or slowdown could trigger a swift downfall.
Product And Market Related Challenges
Palantir’s heavy reliance on government contracts come with its own set of risks. The Trump administration’s push to ease global tensions, from mediating between Ukraine and Russia to addressing the Israel-Palestine conflict – could reduce demand for Palantir’s software, which often sees higher uptake during periods of geopolitical strain. Moreover, government contracts are also inherently unpredictable, with shifting priorities, budget cuts, or lost bids posing a direct threat to revenue growth. Although this segment gives Palantir scale and stability, it leaves the company exposed to political cycles and spending decisions that could significantly hit the top line. While these risks can be easy to overlook amid the strong momentum, they remain important factors that could quickly change the company’s growth trajectory.
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On the commercial side, growth has been solid but still trails the government business, with sales rising 47% versus 49% for government contracts. U.S. commercial revenue nearly doubled in the latest quarter, but international expansion has been more muted. Scaling the commercial segment could prove challenging in the long term, as Palantir’s Foundry platform commands high ticket sizes and requires complex, costly implementations, making it less suited to small and mid-sized clients.
Foundry often needs dedicated teams for deployment and management, which limits scalability unlike simpler off the shelf software tools. Adding to the challenge, Palantir could face more intense competition from large, diversified tech players such as Microsoft, who can leverage their vast customer bases to cross-sell competing solutions. This could pose a threat to Palantir’s ability to gain share in the commercial market.
While PLTR looks expensive, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has a track record of comfortably outperforming its benchmark that includes all 3 – S&P 500, Russell, and S&P midcap. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.