Up 130%, is this popular S&P 500 stock massively overvalued?

The S&P 500‘s experienced a fairly modest period of growth so far in 2025, at least compared to historical norms. And yet there are still plenty of US stocks achieving gargantuan returns, especially in the artificial intelligence (AI) tech space. And perhaps the most popular example of this is Palantir Technologies (NASDAQ:PLTR).

Excitement surrounding the firm’s Artificial Intelligence Platform (AIP), and its ability to help organisations leverage data analytics, has generated extraordinary momentum. Subsequently, shareholders have seen their investment grow a jaw-dropping 130% since the start of the year, and 1,780% since 2020!

But with so much growth now under its belt, could investor hype and excitement push this US stock too close to the sun?

Why are Palantir shares flying?

Following its latest quarterly results, Palantir’s continued to defy expectations with record-breaking revenue and profit growth. In fact, during the second quarter, the firm posted over $1bn in sales – a milestone that arrived much faster than analysts were expecting.

The firm’s benefiting from strong AI demand among its corporate customers. But its core governmental revenue streams are also expanding at an impressive pace. Most recently, the company secured a new $10bn contract with the US Army as well as a $30m deal with the Immigration and Customs Enforcement agency.

All of this ongoing success led to management hiking its full-year revenue projections from $3.9bn to $4.15bn. And looking to the third quarter, the company appears to be on track to deliver even more growth, with revenue expected to climb 50% higher.

With all this in mind, it’s easy to see why investors are so excited. But after such strong price appreciation in a relatively short space of time, questions are starting to arise about Palantir’s valuation.

A ticking timebomb?

When a business delivers such explosive growth, it’s normal to see its shares priced at a premium. Palantir’s no exception. And its premium’s evident when looking at several valuation multiples. On a forward price-to-earnings ratio basis, the stock trades at a massive 312, while the price-to-sales ratio stands at a staggering 127.

For reference, these numbers have historically sat closer to 16 and 3 respectively, for the S&P 500. As such, the market seems to be baking in enormous growth expectations into Palantir’s valuation. And consequently, if those returns fail to materialise, shareholders could have to endure horrendous volatility.

So far, Palantir’s keeping up with its explosive growth promises. But like all businesses, it’s not immune to disruption. Even as management diversifies the business with commercial customers, the bulk of income continues to stem from government contracts. And that makes the company susceptible to budget cuts or political shifts.

What’s more, while Palantir’s seen as an AI leader today, its growing list of competitors could put that to the test in the future. Microsoft, AWS, and Google are all deploying their own AI solutions. And with much stronger pre-existing relationships with commercial customers, they may impede Palantir’s access to this critical future growth market.

Personally, I think Palantir’s a phenomenal business with a clearly powerful product. But as a stock, the valuation’s just too rich for my tastes.

The post Up 130%, is this popular S&P 500 stock massively overvalued? appeared first on The Motley Fool UK.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Microsoft. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.