Artificial intelligence (AI) is redefining how businesses across every major sector are operating. From enhanced analytics, automating mundane tasks in the workforce, and even building self-driving cars, it seems like AI is extending its influence across the entire economy.

One company that has benefited greatly from AI is Palantir Technologies (PLTR -1.49%). Sure, demand for AI-powered software services has been a bellwether for Palantir over the last couple of years. At a deeper level, though, AI has essentially transformed Palantir's entire operation.

For most of its history, skeptics on Wall Street viewed Palantir as no more than a glorified consulting business working closely with the Department of Defense (DOD). While much of Palantir's business still revolves around government contracts, rising interest in AI has fueled a new wave of potential for the company -- particularly in the private sector.

Since its initial public offering (IPO) in 2020, Palantir's shares have gained about 1,090% as of this writing. Notably, the entirety of these gains occurred after April 2023 when Palantir released its latest software suite, the Artificial Intelligence Platform (AIP).

Yet, even with such a parabolic rise over the last couple of years, Wedbush Securities technology analyst Dan Ives suggests Palantir stock could still soar another 285% over the next two or three years, bringing the company into the coveted trillion-dollar club.

Let's take a look at Palantir's operating results and valuation trends to assess the stock's ability to sustain its current momentum.

Palantir's AI business looks unstoppable, but ...

Palantir has relied heavily on deal flow from the DOD and adjacent government agencies for much of its 20-year history. While there are big bucks to be made in defense contracting, public sector business tends to be lumpy.

The unreliable nature of these deals brings a level of uncertainty as it relates to future growth -- and Wall Street loathes businesses whose growth prospects look unreliable. In order to win over investor confidence, Palantir needed to show that its software platforms could win adoption from commercial customers, too. Thankfully, this is where AI comes into the spotlight.

In the table below, I've outlined Palantir's customer breakdown and commercial account growth over the last several years.

Data Source: Investor Relations. *Customer type breakdown for the trailing-12-month period.

In just four years, Palantir's customer base has shifted from less than two-thirds in the commercial sector to more than 80%. While it may look like the company's commercial business growth is slowing, don't let the figures above fool you.

Back in 2021, Palantir only had 237 customers in total. As of the end of the first quarter of 2025, the company boasted 769 customers. Not only has Palantir accelerated its private sector penetration since the launch of AIP, but the company is also signing more meaningful deals, underscored by consistently rising revenue and widening profit margins.

Image source: Getty Images.

... history suggests tougher times may be ahead for the stock

Palantir's dominance in the software realm over the last couple of years, coupled with a bullish overall sentiment around the AI opportunity, explains the stock's incredible rise. However, smart investors understand that a stock cannot climb forever.

Immediately following the company's Q1 earnings report on May 5, Palantir stock plummeted. This wasn't because the earnings results were poor -- in fact, Palantir knocked it out of the park. Even so, the average consensus price target among analysts covering Palantir is about $94, suggesting about 21% downside as of May 8. Investors may simply be waking up to the fact that Palantir's valuation has expanded beyond levels that are congruent with the company's actual growth.

When AIP launched in April 2023, Palantir's price-to-sales (P/S) ratio was about 8. Since then, its P/S valuation has expanded more than elevenfold in just two years. Palantir is one of the priciest stocks in the software space today, and history suggests that shares are due for a pullback.

Data by YCharts.

Back in the late 1990s, when internet stocks were experiencing their own moment of euphoria, companies such as Microsoft, Amazon, and Cisco topped out at P/S multiples between 30 and 40. This was prior to the dot-com bubble exploding, which saw many high-growth stocks crater in value.

Given that Palantir's current P/S is between two and three times more than the largest and most influential technology businesses during the peak of the dot-com era, investors should prepare for some valuation compression in the near term.

Could Palantir reach a $1 trillion valuation?

Valuation multiples generally normalize over the long term. Another way of looking at this dynamic is that as companies begin to scale and generate more profits, investors begin to value these businesses based on earnings and less so on sales.

Today, Amazon, Cisco, and Microsoft aren't generally analyzed through the lens of the P/S ratio. Rather, most investors look at these businesses on a price-to-earnings (P/E) or price-to-free-cash-flow (P/FCF) basis. So, even though these companies are trading for much lower P/S ratios than they were many years ago, that doesn't mean shareholder value wasn't created over the last 20 years. Amazon and Microsoft, in particular, have evolved into two of the most valuable companies in the world as measured by market cap.

Even though Palantir's valuation multiples will likely compress over the next couple of years, that doesn't necessarily mean the company won't ever become a trillion-dollar stock. That said, it probably won't happen in the next two or three years as Ives forecasts.

Instead of focusing on the next two or three years, investors should think longer term. The most prudent strategy regarding an investment in Palantir is to buy the stock at different price points, take advantage of dips, and prepare to hold onto your shares for many years.