Palantir Stock: Overvalued or Cheap?

Palantir Technologies' stock has surged 141% this year, making it the top-performing stock in the S&P 500 for two years running. Despite its high valuation, CNBC's Jim Cramer believes Palantir is "ridiculously cheap." The company's high price-to-sales multiple and expanding ratio suggest it may be overvalued, but Cramer justifies his stance by looking at the Rule of 40, a SaaS metric that calculates revenue growth and profit margin. Palantir's Rule of 40 score is impressive, indicating that its revenue growth and profit margin are strong, supporting Cramer's view that the stock is undervalued.

Palantir Technologies' stock (NASDAQ: PLTR) has been a standout performer in the S&P 500, surging 141% year-to-date, and maintaining its position as the top-performing stock for two consecutive years. Despite the impressive gains, the stock's high valuation has sparked debate among investors and financial professionals. CNBC's Jim Cramer, for instance, believes that Palantir is "ridiculously cheap," a stance justified by the company's strong performance metrics, particularly its Rule of 40 score.

The Rule of 40, a SaaS metric that combines revenue growth and profit margin, has been a critical factor in Palantir's valuation discussion. According to [1], Palantir's Rule of 40 score of 94 in the second quarter was a testament to its robust financial performance. The company reported 48% revenue growth and 46% adjusted operating margin, indicating strong operational efficiency and profitability.

However, the stock's high price-to-sales multiple and expanding ratio have raised concerns about overvaluation. Palantir trades at roughly 290x forward earnings and 105x FY’25 revenue, levels that look stretched even with accelerating growth. For comparison, SaaS interface design player Figma, which went public last week and is expected to post similar growth, trades at about 35x forward earnings, while Snowflake, a cloud data warehousing major, trades at roughly 15x forward revenue and is on track for 25% revenue growth this year.

Palantir's heavy reliance on government contracts also presents risks. The company's U.S. government segment delivered standout performance, with revenue up 53% to $426 million last quarter. However, government contracts are inherently unpredictable, with shifting priorities, budget cuts, or lost bids posing a direct threat to revenue growth. Additionally, the commercial segment, while growing, still trails the government business, with sales rising 47% versus 49% for government contracts.

Despite these risks, Palantir's strong performance metrics and expanding market opportunities continue to attract investor interest. The company's AI narrative and position as a go-to provider for governments and enterprises looking to deploy AI software at scale have been appealing for investors. Moreover, the generative AI boom has served as a strong tailwind, further fueling investor enthusiasm.

In conclusion, while Palantir Technologies' stock has surged significantly, its high valuation and reliance on government contracts present risks that investors must consider. The company's strong Rule of 40 score and expanding market opportunities, however, suggest that it remains an attractive investment for those willing to navigate the risks.

References:
[1] https://www.forbes.com/sites/greatspeculations/2025/08/11/palantir-stock-at-190-time-to-cash-out/
[2] https://www.fool.com/investing/2025/08/10/this-ai-stock-just-crushed-palantirs-rule-of-40-sc/