Palantir (PLTR 0.28%) rocketed to a record high of $130 per share on May 14. The stock has since retreated modestly, but it still leads the Nasdaq-100 with a 63% year-to-date return as of May 27. Can Palantir maintain its momentum in the remaining months of 2025?

History says this will happen next.

Palantir helps customers optimize decision-making with artificial intelligence

Palantir develops data analytics software for clients in the commercial and government sectors. Its primary platforms (Gotham and Foundry) let users integrate information, train machine learnings models, and query data. And its adjacent artificial intelligence platform (AIP) is a large language model orchestration tool that lets clients infuse operations with generative AI.

Palantir's key differentiator is an ontology-based software architecture. The ontology is a framework that sits atop datasets and models. It defines the relationship between digital information and physical assets like factories, equipment, and supplies. The ontology not only lets users query data to improve decision-making but also creates a feedback loop that yields better insights over time.

Palantir reported impressive first-quarter financial results. Revenue increased 39% to $884 million, the seventh consecutive acceleration, due to especially strong sales growth in the government segment. And non-GAAP net income increased 62% to $0.13 per diluted share. Management also raised full-year guidance such that revenue is projected to increase 36% in 2025.

Palantir is well positioned to maintain that momentum. Forrester Research has ranked the company as a technology leader in artificial intelligence and machine learning platforms, a market forecast to grow at 40% annually to reach $153 billion by 2028. Morningstar analyst Mike Giarelli earlier this year wrote, "This company can be the next software juggernaut."

However, investors should not ignore valuation. It may not matter much to the market right now, but valuation always matters eventually. And Palantir shares currently trade 265 times adjusted earnings. That looks very expensive for a company whose earnings are forecast to increase 41% in 2025. However, Palantir has topped the consensus earnings estimate for six consecutive quarters, beating it by an average 10%.

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Palantir is one of the most expensive software stocks in history

I just mentioned that Palantir's price-to-earnings (P/E) ratio is extremely high for a company whose earnings are forecast to increase at 41% this year. Having said that, one could argue that because Wall Street has regularly underestimated Palantir, earnings may increase much faster than anticipated. So, let's consider valuation from another perspective.

Palantir attained a price-to-sale (P/S) ratio above 100 in February, and it hit that level again in May. I reviewed the valuations of more than 50 software stocks during the last 20 years: Only six others achieved a P/S multiple above 100 during that period, and all of them eventually declined at least 70%, as discussed below:

• Bill Holdings traded at 103 times sales on Sept. 8, 2021. The stock eventually declined 87%.
• Cloudflare traded at 114 times sales on Nov. 18, 2021. The stock eventually declined 83%.
• SentinelOne traded at 106 times sales on Sept. 16, 2021. The stock eventually declined 82%.
• Snowflake traded at 184 times sales on Dec. 8, 2020. The stock eventually declined 72%.
• SoundHound AI traded at 111 times sales on Dec. 26, 2024. The stock eventually declined 70%.
• Zoom Communications traded at 124 times sales on Oct. 19, 2020. The stock eventually declined 90%.

As shown above, only six software stocks beside Palantir have reached 100 times sales during the last two decades, and the average peak-to-trough decline was 81% after attaining that valuation. We can apply that number to Palantir to make an educated guess about what may happen in the future.

Specifically, Palantir closed at $124.62 per share on Feb. 18, the day the stock reached its peak valuation of 107 times sales. It will eventually decline 81% to $23.67 per share if its performance matches the historical average. That implies roughly the same amount of downside from its current share price of $123.

Of course, past performance is no guarantee of future results, and there is always a chance Palantir is an exception to the rule. But I think investors should avoid buying the stock at its current price. The risk-reward profile is heavily skewed toward risk.