Shares of Palantir Technologies (PLTR 1.67%) are up 280% in the past year. Although an impressive run-up, it is still nearly 30% lower than its three-year high of $125 on February 18. 

The company delivered an exceptionally strong fourth-quarter report on Feb. 3, showing that its revenues rose 36% year over year to $828 million, significantly exceeding the analysts' consensus estimate of $775 million. That top-line growth rate was particularly impressive considering that it was an acceleration from the 30% revenue growth rate reported in Q3, and came relative to a higher base.

While the stock initially reacted favorably to the earnings results, the excitement seems to be dying down. Investors are concerned about CEO Alex Karp disclosing plans to sell $1.2 billion worth of the company's shares. Palantir has also been negatively impacted by the news last week that Defense Secretary Pete Hegseth ordered the military to prepare plans for significant budget cuts over the next five years.

So now the question is: Is this valuation retreat a buying opportunity or is Palantir's bubble finally ready to burst? 

Impressive AI strategy

Unlike many artificial intelligence (AI) players that have focused on developing advanced foundation models, Palantir has built its operation around a proprietary ontology system -- which gives more importance to effective AI implementation across enterprise use cases.

Ontologies create digital frameworks that organize and define how an organization's assets, both digital and real-world, relate to each other. This helps Palantir create "digital twins" of the clients' operations, unifying and connecting their fragmented data assets, and clarifying the dynamic relationships between them. Since it can take decades of work and investment to build a robust ontology system, what Palantir offers its clients is not easily replicable. This has become a major competitive advantage for Palantir.

The Palantir Artificial Intelligence Platform (AIP) also emerged as a major catalyst. AIP enables clients to seamlessly integrate generative AI into their operations, allowing them to rapidly deploy AI tools for real-world use cases in a secure, observable, and well-governed fashion.

Palantir's recent go-to-market strategy centered on AIP "boot camps," during which they start with a real and pressing business issue for the potential client, and show them exactly how Palantir's tools can be used to address it. The result has been an acceleration in sales conversion rates.

Strong U.S. commercial and government business

AIP has been a major growth driver for Palantir's U.S. commercial business. As of the end of 2024, the company had 382 U.S. commercial customers, almost five times more than it had three years ago (before the launch of AIP). Its U.S. commercial segment revenues were up 64% year over year in the fourth quarter, and up 20% sequentially. The segment also recorded its strongest quarter of total contract value -- $803 million, up 134% year over year and 170% sequentially.

Finally, Palantir's U.S. government business remains robust, growing by 45% year over year and 7% sequentially in the fourth quarter.

What next?

Despite the business' many positives, it is undeniable that Palantir stock is trading at an unsustainable valuation level. Even after its recent share price slide, it still trades at nearly 196 times forward earnings.

Palantir's stock is still up by 19% so far in 2025 -- a significant drop from over 40% gains a week ago. A look at the company's historical performance can give a better idea of what can happen next.

Data Source: Yahoo! Finance. Calculations by author.

Historically, Palantir has been highly volatile. Every major share price high has been followed by a significant correction.

Palantir's shares seem to be following the same roadmap this time. However, it is undeniable that the company's fundamentals are stronger this time around, thanks to the strength of its AI initiatives and its rapidly expanding commercial and government businesses. The company is also profitable, with GAAP net income of $462 million and adjusted free cash flow of $1.25 billion in 2024. The dramatic share price pullback within a week seems quite unjustified. Against this backdrop, long-term investors with significant risk tolerance could consider taking a small stake in Palantir -- although caution is still warranted. Since the share price bottom is not yet clear, investors who choose to add it to their portfolios would do well to consider using a dollar-cost averaging strategy. This would expose them to Palantir's upside potential while reducing their overall risk.