Palantir Technologies (PLTR 1.44%) shares have advanced 550% since January 2024. For context, it was the best performing stock in the S&P 500 (^GSPC 0.43%) and the second-best performing stock in the Nasdaq-100 during that period.

That tremendous share-price appreciation was driven by a series of increasingly impressive financial results. Palantir has emerged as a leader in artificial intelligence (AI) platforms, and retail investors, in particular, have become enamored with the company. But Palantir is currently the most expensive software stock on the market by a wide margin.

History says this will happen next.

Palantir is the most expensive software stock on the market

Louie DiPalma of William Blair Research says Palantir is the most expensive software stock. "The company's valuation trades at 64 times 2026 consensus sales. CrowdStrike is the second highest name in all of software in terms of valuation at 18 times," he told Yahoo Finance. That means Palantir could fall 70% and still be the most expensive software stock, based on its forward price-to-sales ratio (P/S).

Palantir is also extraordinarily expensive in terms of trailing-12-month sales. It hit 107 times sales in February and recently retested that level by rebounding to 100 times sales in early May. I reviewed the valuations of more than 50 software stocks over the last 20 years, and only six achieved a P/S ratio above 100. All of them eventually fell at least 70%, as detailed below:

• Bill Holdings traded at 103 times sales on Sept. 8, 2021. The stock eventually declined 87% and is still down 85% today.
• Cloudflare traded at 114 times sales on Nov. 18, 2021. The stock eventually declined 83% and is still down 44% today.
• SentinelOne traded at 106 times sales on Sept. 16, 2021. The stock eventually declined 82% and is still down 74% today.
• Snowflake traded at 184 times sales on Dec. 8, 2020. The stock eventually declined 73% and is still down 57% today.
• SoundHound AI traded at 111 times sales on Dec. 26, 2024. The stock eventually declined 70% and is still down 62% today.
• Zoom Communications traded at 124 times sales on Oct. 19, 2020. The stock eventually declined 90% and is still down 86% today.

As shown above, only six software stocks (excluding Palantir) have reached 100 times sales in the last two decades, and all of them fell sharply after reaching that extraordinarily high valuation. The average peak-to-trough decline was 81%.

Investors can apply that number to Palantir to model what might happen in the future. Palantir traded at $125 per share when it peaked at 107 times sales on Feb. 18, 2025. Its share price will eventually fall 81% to $23.75 if its performance matches the historical average. That implies 78% downside from its current share price of $110.

Of course, past performance is never a guarantee of future results, but history makes one thing crystal clear: Palantir's present valuation of 87 times sales is unsustainable. I say that because none of the six stocks listed above currently have P/S ratios above 37.

Image source: Getty Images.

Dan Ives says Palantir could be a trillion-dollar company, but most analysts see downside in the stock

Palantir reported strong first-quarter financial results. Customers climbed 39% to 769, and the average existing customer spent 124% more. In turn, revenue increased 39% to $884 million, the seventh-straight acceleration, and non-GAAP earnings increased 62% to $0.13 per diluted share.

The stock sold off following the report, likely due to concerns about valuation, but Dan Ives at Wedbush made a bold prediction during a CNBC interview. "Look, I believe this is going to a trillion-dollar market cap in the next two to three years," he said. That forecast implies 285% upside from its current market value of $260 billion.

However, other Wall Street experts are less optimistic, at least in the near term. Among the 27 analysts who follow Palantir, the median 12-month target price is $98 per share. That implies 11% downside from its current share price of $110, and the lowest target price of $40 per share implies 64% downside.

I think prospective investors should wait for a better entry point before buying the stock, but current shareholders should stay put, provided they plan to hold their shares for at least three to five years. History says Palantir's present valuation of 87 times sales is unsustainable, which means the stock is likely to be very volatile in the coming months.