The mammoth run-up witnessed in Wall Road’s hottest synthetic intelligence (AI) inventory could be nothing greater than a short-lived FOMO (worry of lacking out) occasion.
Greater than 30 years in the past, the appearance of the web started fascinating the eye of on a regular basis traders. Over these three-plus many years, traders have usually had a next-big-thing pattern to chase after. In the mean time, nothing is garnering extra consideration than the evolution of synthetic intelligence (AI).
When most traders take into consideration AI, semiconductor titan Nvidia most likely involves thoughts — and for good cause. Nvidia’s graphics processing items (GPUs) have develop into staples in high-compute information facilities. Its Hopper and successor Blackwell GPUs are powering split-second decision-making, generative AI options, and the coaching of huge language fashions, comparable to chatbots and digital brokers.
Picture supply: Getty Photographs.
However the argument will be made that Nvidia’s time atop the AI pedestal is over, with AI-driven data-mining specialist Palantir Applied sciences (PLTR 1.62%) dethroning it. Palantir inventory has gained almost 2,000% since 2023 started, and its market cap has grown to $317 billion, as of the closing bell on July 3. It went from an organization tech traders considerably adopted to being one of many most-influential tech companies on this planet.
Palantir’s success has been fueled by the irreplaceability of the providers it provides. Its Gotham platform aids federal governments with information gathering and evaluation, in addition to army mission planning and execution. In the meantime, Foundry is relied on by companies to make sense of their information and streamline their operations. With no one-for-one large-scale replacements for Palantir’s AI- and cloud-based software-as-a-service (SaaS) mannequin, its working money movement is very predictable and safe.
Moreover, Palantir made the flip to recurring profitability nicely forward of Wall Road’s consensus expectation. Sustaining a quickly rising moat and validating its aggressive edge with recurring income is a fast strategy to win over Wall Road and traders.
However what if Palantir’s momentous run-up is nothing greater than a short-lived FOMO (worry of lacking out) occasion? Whereas this opinion will undoubtedly be unpopular given the riches this firm has bestowed on shareholders since 2023 started, there are seven legitimate causes to imagine Palantir inventory can plunge 60%, if no more.
1. Subsequent-big-thing applied sciences at all times endure bubbles
One of many greatest challenges for Palantir Applied sciences is that traders have a horrible behavior of overestimating how rapidly a game-changing innovation will achieve utility and be adopted by companies and/or shoppers.
Together with the web, each next-big-thing know-how for greater than three many years has endured a bubble-bursting occasion. That is to say that each innovation has wanted time to mature. With most companies not producing a constructive return on their AI investments, nor optimizing their deployed AI options, it is a truthful assumption that AI is strolling down the identical path as prior game-changing applied sciences.
Whereas the multiyear authorities contracts (through Gotham) and subscriptions (through Foundry) Palantir has earned ought to maintain its gross sales from plunging if the AI bubble bursts, it will do nothing to save lots of the corporate’s inventory from a wave of unfavourable investor sentiment.
2. Gotham’s ceiling is decrease than traders understand
To this point, Gotham has been the working platform answerable for driving Palantir’s income and its annual progress charge that sometimes vary between 25% and 35%. Having the U.S. authorities in its nook has undeniably been a constructive.
Nonetheless, Gotham’s consumer pool is slightly restricted. Because it offers information assortment and army mission planning/execution, Palantir’s flagship SaaS mannequin is not obtainable to China, Russia, and a laundry listing of different international locations that are not bona fide allies of the U.S. This considerably lowers Gotham’s long-term ceiling greater than traders most likely understand.
Picture supply: Getty Photographs.
3. The Trump administration’s deal with authorities effectivity is worrisome
For defense-oriented companies, there’s normally no higher state of affairs {that a} unified Republican authorities. Traditionally, the GOP has favored aggressive protection spending, which performs proper into the arms of Palantir’s Gotham platform. President Donald Trump has beforehand famous the necessity to maintain home AI improvements protected.
However Trump’s marketing campaign promise has additionally been to make Washington, D.C., extra environment friendly. Although the president has been supportive of protection firms prior to now, there’s little assure that the Trump administration will not intention to cut back federal spending sooner or later. There’s additionally little visibility of what protection spending would possibly entail past Trump’s 4 years in workplace.
4. Palantir’s earnings high quality is poor
A public firm that is added greater than $300 billion in market cap during the last 30 months ought to be completely crushing it from a elementary standpoint. With Palantir shifting to recurring profitability, the expectation is that speedy gross sales progress in Gotham and Foundry is powering its web revenue greater. But this is not the entire story.
Final yr, 40% of Palantir’s $489.2 million in pre-tax revenue was traced again to curiosity revenue on its money. Throughout the first three months of 2025, 23% of the corporate’s pre-tax revenue got here from curiosity on its money. Whereas I am not faulting Palantir or its administration for producing curiosity revenue on the corporate’s money pile, it is necessary to acknowledge {that a} vital chunk of the corporate’s pre-tax revenue is coming from a non-innovative and unsustainable supply.
PLTR Shares Excellent information by YCharts.
5. Share-based compensation is working in opposition to traders
Another excuse for traders to cross on Palantir inventory is the corporate’s persistent share-based compensation.
Inventory-based compensation usually serves a objective. Handing out vested shares, inventory choices, and so forth, encourages proficient people to stick with an organization. Inventory-based compensation can be used as one thing of a dangling carrot to encourage staff and managers to fulfill particular progress targets.
Sadly, stock-based compensation can have a deleterious impression for shareholders. Within the case of Palantir, steadily climbing share-based compensation is rising its excellent share depend and having a dilutive impact on current shareholders. Whereas this dilutive impact has, up to now, been masked by AI euphoria and FOMO, historical past suggests that is extremely unlikely to proceed for an prolonged interval.
6. Insiders have been persistent sellers for almost 5 years
Buyers would even be smart to pay attention to the persistent insider promoting exercise of Palantir Applied sciences’ inventory since its preliminary public providing (IPO) in September 2020.
As soon as once more, there is a little bit of a caveat to this information. Particularly, the compensation of executives is commonly closely weighted towards shares and inventory choices, which requires the sale of shares to cowl their federal and/or state tax legal responsibility. In different phrases, not all insider promoting is essentially unhealthy information or indicative of administration dropping religion of their firm.
With the above being mentioned, greater than $7.4 billion in Palantir inventory has been offered because the September 2020 IPO, with former Chief Accounting Officer Heather Planishek’s 10,000-share purchase in Could 2025 being the solely govt or director buy in 57 months.
If executives and administrators will not purchase shares of Palantir, why must you?
PLTR PS Ratio information by YCharts. PS Ratio = price-to-sales ratio.
7. Palantir’s valuation is an unsustainable eyesore
The ultimate piece of the puzzle that explains why Palantir inventory can plunge 60% (or extra) is its valuation.
During the last three many years, megacap shares on the vanguard of next-big-thing developments have traditionally topped out at price-to-sales (P/S) ratios starting from 30 to 43. A few of the brand-name firms that match this definition embrace Microsoft, Amazon, Cisco Methods, and even Nvidia, based mostly on its peak P/S ratio of 42 final summer season.
Palantir inventory ended the earlier week at a trailing-12-month P/S ratio of greater than 107! It is successfully 3 times greater than different megacap firms earlier than their respective bubbles burst.
Even when Wall Road’s consensus gross sales estimates show correct and Palantir’s income catapults by 263% to $10.42 billion from 2024 to 2028, its present valuation (assuming no share-based compensation) would place it at a lofty P/S ratio of 30 by the top of 2028. It is a traditionally unsustainable valuation, and it is only a matter of time earlier than Wall Road and traders come to this realization.
