Palantir Stock Valuation Risk Would You Take The Risk?

$Palantir Technologies Inc.(PLTR)$

As the market faces increased volatility, investors are reassessing their portfolios and looking closely at the stocks most vulnerable to a deeper sell-off. Today, I’m going to evaluate Palantir stock and break down the three biggest risks that investors should be aware of in 2025. These are critical factors that could affect the stock’s performance, and understanding them will give you the insight you need to make informed decisions.

Risk #1: Palantir’s Overvalued Stock Price

Let’s start with the most glaring risk for Palantir investors: its sky-high valuation. In fact, this is by far the biggest risk to Palantir stock. Whether you look at its price-to-earnings (P/E) ratio, price-to-sales (P/S) ratio, or any other valuation metric, Palantir is currently trading at what can only be described as an elevated price compared to its fundamentals.

Now, let me explain why this is so concerning.

I ran a proprietary discounted cash flow (DCF) valuation model to estimate Palantir’s intrinsic value, and the result is eye-opening. According to my calculations, Palantir’s intrinsic value per share is $23.70. That’s significantly lower than its current market price of $80. This suggests the stock is overvalued by more than 3 times its intrinsic worth.

I didn’t just pick random numbers here — I used assumptions that are quite generous for Palantir:

• I forecasted free cash flow will grow from $1.5 billion in 2025 to over $17 billion by 2034 — that’s a 10x increase in the company’s cash flow.

• Additionally, I applied a long-term growth rate of 6%, which is higher than the typical 3-5% growth rate I use for most other companies. In other words, I’ve been very optimistic about Palantir’s future growth potential.

Even with these growth-friendly assumptions, the stock still looks overvalued at today’s price.

Now, when we look at Palantir’s forward P/E ratio, it’s trading at an astonishing 114x forward earnings. To put this in perspective, the average stock in the S&P 500 trades at roughly 20x earnings. That means Palantir is 5 times more expensive than the typical company in the broader market.

Sure, Palantir is an exceptional company with a unique business model and a strong market position, but does that justify such a steep premium? In my opinion, the premium valuation is overdone. Let’s look at the numbers from last year: at the beginning of 2024, Palantir was trading at a much more reasonable forward P/E in the 40s, which I thought represented good value. But now, with a P/E ratio in the 100s, it’s hard to ignore the risk of a correction.

If sentiment shifts and investors become less willing to pay such a high price for Palantir, we could see the stock price fall significantly. Even if Palantir’s earnings per share remain stable, a contraction in its valuation multiple could lead to a 50% decline in the stock price, still leaving it more expensive than it has been for most of the past three years.

Risk #2: Insider Selling by CEO Alex Karp

The second major risk facing Palantir stock is insider selling, specifically the planned sale of nearly 10 million shares by CEO Alex Karp. He has already started offloading some of his shares in a systematic manner, which raises concerns for investors.

Now, let me be clear — insider selling is common. CEOs often sell shares to diversify their wealth, especially if the majority of their personal net worth is tied up in the company. I don’t mind when executives sell shares for this reason. In fact, it's a sign of financial prudence to reduce personal risk by spreading investments across different assets.

But here’s the catch: the market doesn’t always see it that way. When investors see a CEO selling off a large portion of their stake, they often ask, Why are they selling? Do they know something we don’t? This could spark a panic or at least make other investors question their position, leading some to sell off their shares.

Now, the situation with Palantir is a bit more complicated because the stock is already highly priced. If Palantir were trading at a more reasonable valuation, insider selling wouldn’t be such a big deal. But when the stock is priced to perfection, any hint of insider selling can be the catalyst for a valuation reset.

So while CEO Karp’s sale isn’t necessarily a red flag in isolation, combined with the overvalued stock and the current market conditions, it adds a layer of risk that investors need to keep an eye on.

Risk #3: Palantir’s Reliance on Government Contracts

The third risk that could weigh on Palantir’s stock price is its heavy dependence on government contracts. Now, this isn’t necessarily a bad thing in and of itself. Government contracts are typically considered stable, and businesses that sell to the government often have more predictable revenues compared to those relying on the private sector, which is more sensitive to economic fluctuations.

However, the issue with Palantir is that the U.S. government is actively working to cut spending. As the government looks to reduce its budget and focus on cost savings, Palantir, which gets a significant portion of its revenue from government contracts, could see its business impacted negatively. If government spending in areas Palantir serves decreases, the company may struggle to maintain growth.

This is especially risky right now, given that the U.S. economy is likely headed into a recession, and government spending cuts are likely to continue. Unlike businesses that can adjust their strategies in response to economic shifts, Palantir’s heavy reliance on government contracts leaves it more exposed to these budget cuts.

Bonus Risk: Ethical and Reputational Concerns

A final risk worth mentioning is Palantir’s ethical concerns and reputational risks. The company has faced criticism over its involvement in data analytics for surveillance purposes, particularly with government agencies. While some see Palantir’s work as essential to national security, others view it as an invasion of privacy and a violation of civil liberties.

Additionally, Palantir has struggled to expand internationally. The company’s close ties with the U.S. government have made foreign governments skeptical about doing business with Palantir. This has limited the company’s ability to grow outside the U.S., and could continue to be an obstacle to global expansion.

While these reputational issues may not be an immediate concern, they are important to keep in mind, especially as the company seeks to expand internationally and continue growing its market share.

In the eye of the beholders

Let’s assume, for the sake of argument, that Palantir stock is in a bubble. So, is this bubble about to pop? The most honest answer is... maybe, maybe not.

Bubbles can often last much longer than we expect. Take the dot-com bubble of the 1990s, for example. In December 1996, then-Federal Reserve Chairman Alan Greenspan famously warned of "irrational exuberance," yet the dot-com bubble didn’t actually burst until 2000.

The key takeaway is that the appeal of stock prices, much like beauty, is subjective—it’s all about perspective. As long as enough investors believe that Palantir’s stock price can keep climbing, it will. For a bubble to pop, a critical mass of investors needs to recognize the bubble and begin to sell. Until that happens, Palantir might continue defying expectations for quite some time.

Conclusion: Palantir’s Biggest Risk is Its Valuation

To wrap things up, the biggest risk for Palantir stock is its extremely high valuation. While Palantir is a strong business with a unique position in the market, the stock is priced for perfect growth, and that leaves little room for error. If market sentiment shifts or the company’s fundamentals don’t meet expectations, investors could face a significant downturn in stock price.

On top of that, insider selling, government spending cuts, and reputational risks add additional layers of concern that could further impact the stock.

Palantir remains an intriguing company, but it’s important for investors to approach it with caution, especially given the current market conditions and valuation.

I hope you found this analysis helpful. Let me know your thoughts in the comments below.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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