• Palantir's share price has skyrocketed 585% since January 2024 amid strong demand for its artificial intelligence platform.

• Palantir's forward price-to-sales (PS) ratio currentlyexceeds 55, making it one of the most expensive software stocks of the past decade.

• Only a few software stocks achieved a forward PS ratio above 40 in the past decade, and all of them eventually declined by at least 70%.

Palantir Technologies earlier this month reported fourth-quarter financial results that crushed Wall Street's expectations. The stock has rocketed higher on the news, such that its total return since January 2024 now stands at 585%.

Palantir was the best-performing member of the S&P 500 during that period. In fact, it beat the next closest stock by 250 percentage points. But Palantir is now one of the most expensive software stocks in history, and there is little questions about what happens next: One way or another, it's valuation is going to fall.

Palantir is one of the most expensive software stocks of the past decade

Brent Thill at Jefferies in a recent CNBC interview praised Palantir for strong execution in the fourth quarter. But he also noted the stock has a forward price-to-sales (PS) ratio above 55, a valuation that few software companies have ever achieved and no company has ever maintained. To clarify, the forward PS ratio equals the market value divided by the forecasted revenue from the next year.

My own research led to the same conclusion. After looking at more than 50 software stocks over the last decade, here's what I found:

• Only five software companies (excluding Palantir) achieved a forward PS ratio above 40: Asana, Confluent, Snowflake, UiPath, and Unity Software.

• Only Snowflake achieved a forward PS ratio over 50. The stock peaked just shy of 60 times forward sales in November 2021.

• After hitting their peak valuations, all five stocks fell more than 50% in the next 12 months. Additionally, they ultimately suffered maximum declines exceeding 70%, and they are still at least 50% below their record highs today.

Palantir has a forward PS multiple of 56 as of Feb. 13. Snowflake is the only other software company in the last decade (to my knowledge) to achieve a higher valuation multiple, and its stock crashed after peaking near 60 time forward sales. That is particularly worrisome because Snowflake's revenue was growing faster than 100% when it hit that valuation multiple.

Comparatively, Palantir's trailing-12-month (TTM) revenue increased just 29% in 2024, and Wall Street expects revenue to increase just 32% in 2025. Meanwhile, Palantir shares have advanced 585% since January 2024, putting upward pressure on its valuation multiple. As a result, it is now one of the most expensive software stocks in history.

That does not mean Palantir is headed for a reckoning anytime soon. However, every available data point suggests its forward PS multiple is headed much lower in the future, and there are only three ways that can happen: Wall Street analysts raise their revenue forecasts significantly, Palantir shares decline sharply, or some combination of the two.

Palantir is an excellent business, but a very risky stock at its current price

The International Data Corporation (IDC) recently ranked Palantir as the market leader in decision intelligence software. And Forrester Research has recognized the company as a technology leader in artificial intelligence platforms, awarding its AIP product higher scores than similar solutions from Alphabet's Google, Amazon, and Microsoft.

That puts Palantir in a good position. IDC estimates AI platform spending will grow at 40% annually through 2028. So, the company has very compelling growth prospects. However, not even the best business is worth buying at any price. Palantir's forward PS multiple is an alarm bell that shouldn't be ignored.

Instead, current shareholders should consider selling down their positions, particularly if Palantir accounts for a large percentage of their portfolio. Similarly, prospective investors should keep the stock on their watchlists for now. I think much better buying opportunities will arise in the future.

For instance, even though Snowflake is currently 52% off its record high, the stock is also 77% above its record low. So, investors have had plenty of opportunities to make money on Snowflake since its sharp decline in early 2022. The same is likely true of Palantir. The key is waiting for the right price, rather than chasing a stock with an alarmingly high valuation.