Up 141% this year, can Palantir Technologies stock continue to soar higher?

One of the top artificial intelligence (AI) stocks held this year was Palantir Technologies (PLTR 4.05%). Its new AI platform, AIP, has unlocked major opportunities for the business and revenue growth is accelerating, fueling bullish investor sentiment around the business. And now that technology stock has joined S&P 500there’s even more excitement around Palantir, and its stock hit a new 52-week high on the news.

Today, the stock is fast approaching an all-time high thanks to a 141% year-to-date gain. Is it too late to invest in this hot AI stock, or can Palantir stock go even higher?

Investors are paying a large premium for Palantir

Palantir’s platform ranked well in a report from Forrester Researchand appears to be a leading provider of AI solutions that help customers automate processes and make better decisions along the way. The data analytics company has routinely announced deals with new clients.

In the quarter ended June 30, Palantir’s revenue rose 27% year over year, with particularly strong growth in its US commercial segment, where sales rose 55%. For the full year 2024, the company expects its US commercial business to grow at least 47%, while its top line will reach about $2.75 billion, for an overall growth rate of 23% .

These encouraging results suggest that the business is moving in the right direction. But with the stock trading at 244 times trailing earnings and 40 times revenue, are investors paying too much of a premium for the business? Is it worth it given the potential headwinds?

Why Palantir’s Business Could Slow Down in the Short Term

Palantir’s strong valuation means plenty of future growth is priced into its stock, and any bumps or hiccups along the way could derail the stock. Investors shouldn’t forget that in 2022, the trend in the tech sector sent Palantir shares down 65% for the year.

It has recovered and business is looking good now, but weakening economic conditions could lead to reduced AI spending. Meanwhile, the US government is looking to tap into more tech companies so it’s not as dependent on a single vendor, according to a report from The Wall Street Journal at the beginning of this year. Government revenue still makes up the bulk of Palantir’s top line, but grew at a slower pace of 23% last quarter, meaning the commercial segment is recovering quickly.

Should you buy Palantir stock?

Palantir’s business looks much more secure than it did a year or two ago, when the company is routinely turning a profit. But at such an inflated valuation, it may be difficult for the stock to outperform over the long term.

The excitement surrounding the inclusion of the S&P 500 gave stocks a boost, but ultimately, stock fortunes are all about growth. And Palantir isn’t growing at a fast enough rate to justify paying such huge earnings and earnings multiples for the stock.

With this amount of hype already priced into the stock, there is a very real risk of a future correction. Even if you buy Palantir with a long-term mindset, there are better AI stocks out there.