Artificial intelligence (AI) stocks haven't fared well over the past few weeks. Many of the most prominent AI stocks  tumbled, which may lead many investors to wonder if now is a great time to scoop up some of these dominant companies.

Palantir Technologies (PLTR -10.73%) hasn't escaped this rout, and its stock has fallen over 35% from its all-time high. That's a significant drop, but is the dip worth buying?

Palantir's software has seen its growth spike in recent quarters

Palantir has become one of the most popular AI stock picks due to its top-notch data analytics software. Originally, its software was intended for government use. It took several data inputs, processed them, and then gave those with decision-making authority the best real-time information possible. This use case eventually expanded to the commercial side, although government revenue still makes up the majority of Palantir's total revenue.

One of the biggest innovations that Palantir has launched over the past few years is its AIP (Artificial Intelligence Platform). AIP allows clients to integrate AI throughout the inner workings of a business, rather than have it be used on the side.

This is critical for multiple reasons. First, it allows management to control what information is fed into an AI model. This prevents information leaks, as sensitive information (be it classified government intel or trade secrets) could be uploaded into a third-party AI model, where the company has no control over what's done with the data. It's also useful because it forces employees to use AI models, which could be better decision-makers than humans.

Those are just a few benefits of AIP, although the list could go on.

All this adds up to the hype behind Palantir's stock, as it has brought strong growth for the company. In Q4, Palantir's revenue rose 36% year over year to $828 million. That strength is expected to continue throughout 2025, with Q1 revenue expected to be $860 million (36% growth) and 2025 revenue to be $3.75 billion (31% growth) at the midpoint.

Furthermore, unlike many of its software peers, Palantir is also profitable. While profit margins took a dip in the fourth quarter, it was due to a huge spike in stock-based compensation, as management rewarded its employees for the strong year by pulling forward the vesting date of their stock options.

While this may bother Wall Street, it's an admirable move and something that investors should likely ignore, as Palantir's operating margin is still trending in the right direction if this one-time expense is ignored.

PLTR Operating Margin (Quarterly) data by YCharts

If you exclude the effect of the one-time stock-based compensation bill, Palantir's Q4 operating margin would have been 17% -- a record high. In Q1, Palantir's strong operating margin should return, but it's something that investors should keep an eye on.

Palantir is a strong business overall, with rapid growth and strong financials. However, its stock was rather pricey before the sell-off. Has any of that changed?

The growth priced into Palantir's stock is unbelievable

Valuing Palantir's stock is tricky. Using the traditional trailing price-to-earnings (P/E) ratio doesn't work because the company hasn't posted a full year of sustained earnings. The forward P/E could be used, but at 150 times forward earnings, the stock is almost too pricey to comprehend.

I think the best way to value Palantir's stock is to test what assumptions are baked into the stock price, and then check to see if there's any room for investors to make profits. Let's make these assumptions:

• Palantir's revenue growth will remain at 30% over the next five years.
• Palantir's profit margin rises to 30%, ranking it among the best software companies.
• The effects of stock-based compensation are ignored.

If Palantir does all three of those things over the next five years, it will produce revenue of $10.6 billion and profits of $3.19 billion. That's substantial growth from its current $2.87 billion in revenue and $462 million in profits, but it would still yield an expensive price.

At that level, Palantir would be valued at 61.3 times earnings. But here's the kicker: Palantir would only achieve that valuation (which is still rather expensive) if its stock price didn't budge from today's levels over the next five years.

This tells me there's no margin of safety in the stock price, and that the stock is highly overvalued. But this doesn't mean that the stock price can't continue rising, as hype can drive a stock a long way. However, financial results matter over the long term, and Palantir doesn't have the growth to justify its current price tag.

As a result, I think investors should stay away from the stock, as it has a way to fall before it's even close to considering buying again.