Key Points

Palantir continues rapid expansion, yet this may fall short of supporting its current valuation.
Signs of decelerating growth could spark a sell-off.
10 stocks we like better than Palantir Technologies

Palantir (NASDAQ: PLTR) has followed a steady downward path since reaching an all-time high in October last year. It recently fell about 35 percent from that peak, which many investors may see as a buying chance.

After all, Palantir stands among firms positioned to gain from the broad growth of artificial intelligence, and its rising revenue supports that view.

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Palantir plans to release its second-quarter results on August 3, and I expect the stock could see a large shift after earnings. Yet the question remains whether the move will be upward or downward.

Image source: Getty Images.

Palantir must surpass expectations

Palantir has engaged with AI longer than most firms. It began in the early 2000s as an AI-first enterprise that applied AI to interpret data. Initially used only for government software, it later expanded into commercial markets. Both segments now matter greatly and drove strong growth numbers in the first quarter.

In Q1, total revenue climbed 85 percent year over year. Palantir issued Q2 guidance of 1.797 billion dollars to 1.801 billion dollars, but the firm has a history of topping its own forecasts. Wall Street analysts have not fully recognized this pattern and project 1.81 billion dollars in revenue, pointing to roughly 81 percent growth. Palantir will probably expand in the 80 percent range this quarter or even reach 90 percent, but that may prove insufficient.

Despite the sharp decline, Palantir stock still carries a very high price.

PLTR PE Ratio data by YCharts

For a business like Palantir, a 40 times earnings multiple counts as fairly normal. That implies Palantir must nearly quadruple its earnings from current levels to reach a sensible valuation. I view that goal as possible, though it could require several years.

If Palantir revenue growth keeps accelerating beyond the first-quarter 85 percent pace, the stock could hold steady or edge higher. Yet if growth slips below that level, as forecasts suggest, the market may react with panic selling. That outcome looks unfavorable and pressures Palantir to keep delivering strong growth numbers.

This situation could create problems for the shares, and I anticipate a sizable drop after second-quarter earnings. Palantir the company impresses, but the stock price remains too elevated to justify an investment at present.

Should you buy stock in Palantir Technologies right now?

Before purchasing shares in Palantir Technologies, weigh this:

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Keithen Drury holds no position in any stocks mentioned. The Motley Fool maintains positions in and recommends Palantir Technologies. The Motley Fool follows a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.