The Biggest Risk to Palantir Stock Has Nothing to Do With Its Valuation

Key Points

• Palantir's revenue growth has been accelerating over the past few quarters.
• CEO Alex Karp said its competitive edge is based on its ability to create customized models while also ensuring clients' data privacy.
• Palantir stock trades at one of the more expensive price-to-sales ratios in the S&P 500.
• 10 stocks we like better than Palantir Technologies ›

Palantir Technologies (NASDAQ: PLTR) is one of the most expensive stocks in the S&P 500, trading at 160 times trailing 12-month sales. That's a major premium.

A stock that's priced for perfection is susceptible to dropping at any sign of a problem, and Palantir stock tumbled earlier this year without any hint of an internal problem; in fact, it has been demonstrating fantastic performance and accelerating growth. It has also recovered from that tumble, and is back in positive territory year to date.

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It was the market's view of what's in Palantir's future that sent the stock lower, and that's a bigger risk to the stock than its valuation.

Why Palantir gets a high valuation

Palantir is one of the foremost artificial intelligence (AI) companies on the market today. It has developed a formidable AI platform that unifies and connects disparate sets of data so users can see patterns, develop insights into that information, and make strategic decisions accordingly.

It has numerous multiyear government and defense contracts, and its services have been critical in certain combat missions. Its commercial business, however, is now Palantir's main growth driver. Companies see how AI can help them grow their businesses through the insights Palantir's platform provides, and they're locking in long-term commitments for its services.

The narrative is so compelling that revenue growth has been accelerating at Palantir, which is why investors are willing to fork over money to invest in its stock even at rich valuations. Total revenue increased by 93% year over year in the 2026 second quarter, driven by a 104% increase in U.S. commercial revenue. CEO Alex Karp noted that the business has essentially doubled over the past year.

Profitability is also soaring, and generally accepted accounting principles (GAAP) operating margin rose from 27% last year to 47% in 2026's second quarter.

How AI impacts SaaS

Palantir is a software-as-a-service (SaaS) company, which means that it leases its software services to clients at monthly or annual rates. Early this year, many SaaS stocks plunged after AI agents were introduced that could complete tasks that previously required humans to use subscription software. The fear was that those AI agents would replace the services that SaaS companies provide. However, so far, this hasn't proven to be the case. On the contrary, many of the top SaaS companies have been using AI to provide even better platforms, and they have been demonstrating robust growth.

However, that fear was not without validity. The preponderance of AI tools and features and the constantly shifting AI landscape are Palantir's biggest risks right now.

Management sees its advantage in offering a complete, sovereign solution for clients that don't want their proprietary data being used to train public foundation models.

"Every organization in the world is awakening to the risks of handing the creators of the language models the keys to their institutions, of letting the models loose within their homes," said Palantir CEO Alex Karp in an August letter to shareholders. Palantir clients can access AI tools that are completely in their control and are developed for their specific and private needs.

Can that be replicated with AI agents? Palantir certainly has a first-mover's edge, but it's not hard to imagine that other AI companies will also be able to create models that ensure data privacy.

Is Palantir vulnerable?

Palantir's Artificial Intelligence Platform (AIP) is drawing strong demand from top U.S. businesses, and it provides real value. In today's era, that's not an extra -- it's a must, because that's what the competition is doing. That puts Palantir in an excellent position to keep growing, and possibly accelerating its growth, in the near term.

The short-term outlook is strong. As of the end of the second quarter, Palantir had $3.37 billion in total contract value, a 49% year-over-year increase. In the quarter, it closed 73 deals worth at least $10 million and 220 deals worth at least $1 million. Results like those will keep its top line increasing for a long time, and that's why it can carry a high valuation. For the third quarter, total revenue growth is expected to be approximately 83%, which would end the acceleration streak.

My view is that Palantir is well-positioned to keep growing for a long time, but investors should consider its risks before investing.

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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.