Palantir Technologies Has Been the S&P 500's Hottest Stock Over the Past Year, and It's Not Even Close. Can Its Incredible Rally Continue?

Palantir Technologies (PLTR 0.45%) is a data analytics company that leverages artificial intelligence (AI) to provide its customers with many opportunities to cut cost and add efficiency to their day-to-day processes. Business is booming and the company now has a market cap in excess of $320 billion.

It’s now more valuable than UnitedHealth Group, Coca-Cola, Wells Fargo, and many other large and well-known businesses. That’s impressive for a company that went public less than five years ago, and whose market cap was once as low as $12 billion.

But with shares of Palantir up a staggering 430% over the past 12 months (the next best stock on the S&P 500 is up 210%), can it still be a good buy right now?

Why Palantir’s stock could continue soaring this year

For Palantir, a bullish case isn’t necessarily hard to make. The company has to beat expectations, increase its guidance (even slightly), and CEO Alex Karp needs to roll out some more superlatives to highlight the company’s strong growth. Previously, he referred to a “tectonic shift in the adoption of our software,” “unrelenting AI demand,” and results that “eviscerated” expectations.

Karp’s enthusiasm is backed by some strong and improving results. Through the first three months of the year, the company reported $884 million in revenue, which was up 39% year over year. In the previous quarter, the growth rate was also strong at 36%.

Another possible catalyst to watch out for is any news on increases in defense spending, either by the U.S. or NATO. With Palantir operating a trusted platform that many government agencies rely on, that could bolster growth prospects for the business and result in investors willing to pay an even higher price for the stock.

Why the stock could fall

Palantir’s stock has been flying but with high valuations come high expectations. And any hint of a slowdown in the business, including a slowing growth rate or soft guidance, could be the stock’s undoing. And that’s why this can be a particularly volatile stock to watch when it reports earnings next month, as those numbers will play a big role in determining whether the hype continues to build, or if there may be a sell-off in the near future.

The consensus analyst price target for Palantir is $89.32, which means that even amid all the upgrades, the stock has as much as 35% downside risk right now. Price targets do, however, change and there can be more upgrades to come from analysts if Palantir continues to deliver strong earnings numbers.

But the problem is that with the stock trading at a staggering 600 times earnings, it trades more like a speculative investment (e.g., cryptocurrency) than a stock; its price simply isn’t tied to fundamentals and that has been the case for some time. If the hype dissipates and investors start to focus more on the company’s raw financials, then it would quickly result in a lot of selling given how egregiously valued the AI stock is right now.

Should you buy Palantir stock?

Palantir has been generating good growth numbers and while they can help lead to even better returns in the near term, it’s a dangerous assumption to believe the stock will only continue rising higher. I won’t try to predict where the stock goes from here on out because Palantir has proven to be so unpredictable. With speculative investments, you’re taking on considerable risk because if the bubble bursts, the free fall could be swift and rapid.

Although Palantir has been a phenomenal stock to own over the past year, you may want to consider pivoting to more modestly valued growth stocks instead, which can offer good returns and reduce some risk along the way.