Palantir Technologies (PLTR -11.49%) was one of the hottest artificial intelligence (AI) stocks on the market in 2024. In fact, with shares soaring 340%, it was the top-performing member of the S&P 500 (SNPINDEX: ^GSPC) last year.

The stock initially maintained its upward trajectory in 2025. It climbed another 65% to peak at $125 per share on Feb. 18. But it finally stalled as investors contemplated possible defense budget cuts and the growing risk that tariffs could push the U.S. economy into a recession.

In March, Palantir stock fell nearly 40% from its February high, and the share price is still 33% below that level. But the stock fell even further once before, and that incident provides some reassurance for investors: History says Palantir will eventually recoup its losses.

Palantir stock eventually rebounded after falling 85% during the pandemic

Palantir peaked at $39 per share in early 2021 as investors became overconfident. The government was spending trillions of dollars on stimulus programs to keep the economy afloat during the pandemic, and the Federal Reserve was holding interest rates near zero based on the assumption that inflation was transitory.

In reality, stimulus checks combined with supply chain disruptions led to the most severe inflation since the 1980s. When the Federal Reserve finally intervened, policymakers were forced to raise interest rates at the most aggressive pace in decades. That sent the S&P 500 into a bear market, and Palantir stock dropped 85% by December 2022 due to a series of disappointing financial results.

However, Palantir shares soared as the S&P 500 recovered. The stock not only blew past its previous record high in October 2024 but also returned 1,200% during the two-year period following its trough in December 2022. Put differently, Palantir rewarded investors who purchased shares at the bottom with 13-fold returns over a very short time period.

However, that does not necessarily mean Palantir is a smart investment today. Read on to learn more.

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Palantir has a competitive advantage in its software architecture

Palantir designs data analytics software for commercial organizations and government agencies. Its core platforms, Gotham and Foundry, let users integrate and make sense of complex information. And its artificial intelligence platform, AIP, adds support for natural language processing, which lets users engage the software conversationally.

Palantir says its key differentiator is an ontology-based software architecture. Allow me to elaborate: Its products are built on a framework (called an ontology) that links digital data to real-world objects. Users can parse that information with machine learning models and other analytical tools to surface insights that improve decision-making. CEO Alex Karp recently told analysts, "We are differentiated because in order to actually make AI work, you need an ontology. No one has an ontology."

Palantir reported impressive fourth-quarter financial results. Customers increased 43% to 711, and the average spend per existing customer climbed 20%. In turn, revenue jumped 36% to $828 million, the sixth consecutive acceleration, and non-GAAP (generally accepted accounting principles) net income rose 75% to $0.14 per diluted share. The company also guided for 36% revenue growth in the first quarter.

Palantir is well positioned to maintain that momentum. Forrester Research recently recognized the company as a leader in artificial intelligence and machine learning platforms. "Palantir is quietly becoming one of the largest players in this market," wrote analyst Mike Gualtieri. The International Data Corp. estimates AI platform sales will increase by 40% annually through 2028.

Palantir still has an alarming valuation problem

Palantir achieved a peak price-to-sales (P/S) ratio of 106 in February. Several Wall Street analysts had expressed concerns about its valuation in the preceding months, but many investors ignored the warnings as the stock plowed higher.

My own research turned up some interesting information. I reviewed the valuations of over 50 software stocks from the last decade, and only six others achieved a P/S multiple over 100. All six eventually fell at least 73%, and the average peak-to-trough decline was 80%. If Palantir follows that trajectory, its price will drop 80% from its February high near $125 per share. That implies a price of $25 per share.

Of course, past performance is never a guarantee of future results, but Palantir still has a valuation problem. The stock trades at 72 times sales, nearly triple its historical average of 25 times sales. Palantir is an excellent business, but investors should be cautious about buying shares today. The stock is not necessarily cheap just because it is currently down 33% from its record high.