However, I personally don’t think the P/S ratio is particularly useful. For me, profitability is a more important measure of a company’s growth because it shows the ability to reinvest in the company and finance future projects.

While Palantir generates positive net income and free cash flow, the company’s profitability profile is far from mature. To add some context here, Palantir is currently trading at a price-to-earnings (P/E) ratio of 403 and a forward price-to-earnings ratio of 167. In either case, it’s simply not appropriate to measure Palantir using traditional earnings-based valuation methods.

A final line of defense is to look at the PEG ratio. The PEG ratio can be useful because it takes into account earnings growth over several years. As a general rule of thumb, a PEG ratio above 1 indicates the stock may be overvalued. Currently, Palantir’s PEG ratio is 3.5.

By all accounts, Palantir is an expensive stock at its current valuation. Additionally, the stock’s current valuation surge (as shown above) is not over yet and the momentum does not appear to be slowing down.

While Palantir stock is undoubtedly expensive, I don’t think it’s a stock to ignore. The company has done an impressive job of diversifying its business by venturing into the private sector while identifying creative ways to revitalize its government business through the power of strategic partnerships with major technology companies and other defense contractors.

I see Palantir as a company that will continue to be a leader in the AI ​​revolution, and so I think it’s likely that even better days lie ahead for investors. I think the best strategy for investing in Palantir is to dollar-cost average over a long-term time horizon while trying to strengthen a position by taking advantage of sell-offs and valuation adjustments.

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*Stock Advisor returns as of December 23, 2024

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Adam Spatacco has held positions at Amazon, Meta Platforms, Microsoft and Palantir Technologies. The Motley Fool has positions in and recommends Amazon, CrowdStrike, Datadog, Meta Platforms, Microsoft, MongoDB, Oracle, Palantir Technologies, ServiceNow, and Snowflake. The Motley Fool recommends the following options: long $395 January 2026 calls on Microsoft and short $405 January 2026 calls on Microsoft. The Motley Fool has a disclosure policy.

Is the newest member of the Nasdaq 100 — up 764% since its IPO — a buy for 2025? was originally published by The Motley Fool