Should Investors Buy the Dip in Palantir and Other High-Flying Growth Stocks?

The recent volatility in Palantir Technologies (PLTR) and other AI/enterprise software stocks has sparked a critical question for investors: Is this a contrarian opportunity to buy the dip, or a warning sign of overvaluation? As the market grapples with the intersection of AI innovation and speculative trading, the answer lies in dissecting the fundamentals, sentiment shifts, and macroeconomic dynamics shaping this sector.

The Case for Palantir: A Dip Amidst Record Growth

Palantir's stock has swung wildly in 2025, surging over 100% year-to-date before retreating sharply in late August. Despite a 19% drop in five trading sessions, the company's underlying business remains robust. Q2 2025 results highlighted $1 billion in revenue (up 48% YoY), driven by its AI Platform (AIP) and expanding government contracts. A $10 billion, 10-year deal with the U.S. Army and a $30 million contract with ICE underscore its strategic value in national security and enterprise AI.

However, the stock's forward P/E ratio of 256.50—far exceeding peers like Microsoft (32.9) and Salesforce (21.7)—has drawn scrutiny. Short sellers like Andrew Left of Citron Research argue the valuation is “detached from fundamentals,” while bullish analysts like Piper Sandler see $182 as a fair target. The recent dip, though painful, may have created a mispricing opportunity for investors who believe in Palantir's long-term AI-driven growth.

Contrarian Value in the AI Sector

Palantir is not alone in facing overcorrection. The broader AI/enterprise software sector has seen mixed performance, with the Morningstar Global Next Generation AI Index surging 26.65% in Q3 2025 versus the S&P 500's 10.23%. Yet, many leaders trade at discounts to their fair value estimates:
- Microsoft (MSFT): -13% undervalued, with Azure's 30% YoY growth and AI integration via OpenAI.
- Adobe (ADBE): -37% undervalued, leveraging AI in Creative Cloud and Document Cloud.
- Taiwan Semiconductor (TSM): -22% undervalued, supplying critical AI chips for global demand.

These discounts reflect both macroeconomic caution and short-term profit-taking in tech. For contrarian investors, the key is to differentiate between temporary volatility and structural risks.

The Risks: Valuation, Competition, and Macroeconomic Headwinds

Critics argue that AI's transformative potential is already priced into these stocks. Palantir's 40% of pretax income from interest on cash reserves, as noted by The Motley Fool, highlights concerns about earnings quality. Meanwhile, the AI inference market—projected to be a $255 billion opportunity—remains a battleground. Nvidia dominates 92% of AI accelerators, but rivals like AMD and startups are gaining traction in edge computing.

Regulatory risks also loom. China's AI cooperation framework and U.S. budget constraints could slow adoption. For Palantir, reliance on U.S. government contracts (53% YoY growth in Q2 2025) exposes it to policy shifts, such as proposed 8% defense spending cuts.

Strategic Entry Points and Diversification

For investors considering a dip-buy strategy, technical and fundamental analysis are essential. Palantir's 50-day SMA at $152.30 and key support levels offer potential entry points. However, diversification across the AI ecosystem—balancing high-growth plays like Palantir with undervalued infrastructure leaders like Microsoft and TSM—can mitigate sector-specific risks.

Conclusion: A Calculated Bet on AI's Future

The recent selloff in Palantir and other AI/enterprise software stocks reflects both overcorrection and legitimate valuation concerns. While the risks are real, the sector's long-term trajectory remains intact. For disciplined investors, this volatility presents a chance to acquire high-conviction positions at discounted prices—provided they can stomach near-term noise.

Investment Advice:
1. For Palantir: Consider a partial entry at or below $152.30, with a stop-loss below $140 to manage downside.
2. For the sector: Allocate to a mix of AI infrastructure (e.g., TSM, MSFT) and application-layer leaders (e.g., Palantir, Adobe) to balance growth and stability.
3. Monitor macro cues: Watch for U.S. defense budget updates and AI regulation developments, which could catalyze further swings.

In the end, the question isn't just whether to buy the dip—it's whether the dip aligns with a long-term thesis of AI-driven productivity. For those who answer yes, the current volatility may prove to be a golden opportunity.