Palantir (PLTR -1.91%) is arguably one of the hottest stocks in town.

In the last 12 months, the tech company delivered a remarkable 425% return to investors (as of writing). Strong financial growth and ongoing strong prospects are teh main driver of its outstanding stock performance.

However, for those new to the company, it is essential to consider both sides of the coin before rushing into the stock. Let's consider the pros and cons of investing in Palantir.

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Why the bulls are excited about Palantir

One of the biggest trends in recent years is the rapid advancement and adoption of artificial intelligence (AI) in our individual lives and business environments. To ride this trend, investors generally focus on two major categories of companies: the hardware and software players that are set to ride the AI wave.

Palantir belongs to the second category of companies that stand to benefit enormously as corporations and government clients invest in the latest AI technologies. One reason is that Palantir has always been a top player in providing data analytics infrastructure and software solutions to help its clients solve complex real-life challenges, whether in counterterrorism or fraud detection. So, AI software is a natural extension of Palantir's existing services to its customers.

For instance, corporations can rely on their existing data infrastructure to train and build customized AI software in areas like machine learning or generative AI. To this end, Palantir launched its proprietary AI product -- Artificial Intelligence Platform (AIP) -- to help customers quickly build and implement customized AI solutions.

With a first-mover advantage, Palantir is positioned to leverage the AI wave in the coming years to build a large business. To put the opportunity size into perspective, Statista estimates that the global AI market could reach $1 trillion in 2031, up from $244 billion in 2025. With just $2.9 billion in annual revenue, the tech company is just touching the tip of the iceberg regarding its possibility.

Moreover, Palantir is already a profitable company with a solid balance sheet. It generated $1.2 billion in operating cash flow in 2024 and ended the year with $5.2 billion in cash, cash equivalents, U.S. Treasury securities, and no debt. So, unlike most unprofitable growth companies, the software company has plenty of financial resources to invest in its future growth.

No wonder Palantir is the darling of growth investors!

Why do the bears have reservations about the stock?

It's easy to see that Palantir is strategically positioned to exploit the AI growth trend. In fact, the tech company delivered a solid 29% revenue growth in 2024, fueled by strong performance in its government and commercial segments. So, naturally, investors are optimistic about the stock.

And herein lies the bears' biggest concern: its stretched valuation. In a year when revenue grew by 29%, the stock price surged by 420%, sending Palantir's stock valuation to the stratosphere. As of writing, the stock has a price-to-sales (P/S) ratio of 99 times. By way of comparison, a blue-chip tech company like Alphabet's has a P/S ratio of only 5.6 times.

With such a high valuation, Palantir must execute flawlessly to keep up with investors' expectations or face the risk of downward revaluation in its stock price. Even then, there is no guarantee that investors will remain equally upbeat about the AI industry in the future. If the AI industry loses its appeal or investors find a new investment trend, they may rotate their capital out of AI companies like Palantir. Even if Palantir executes flawlessly, there is no guarantee that it can maintain its high valuation over time.

Moreover, the AI industry is likely to attract enormous capital and talent thanks to its vast opportunity size. So, the bears have concerns about whether Palantir can maintain its edge as the tech landscape evolves, especially due to intense competition from start-ups and tech giants alike.

While existing customers are unlikely to switch providers easily due to the high switching costs, potential customers will not always find Palantir's offerings the best fit for their needs. For instance, Palantir's platforms are powerful but highly complex, requiring heavy customization for each client. This could limit how easily it can scale to meet market demand compared to more "plug-and-play" AI software solutions.

What it means for investors

Investors should not underestimate the potential risks of owning Palantir's stock.

Palantir is a promising player in the growing AI and data analytics space, with deep government ties and expanding commercial opportunities.

While the upside is real, its high valuation and execution risks mean investors should tread carefully. It could be a big winner in the AI race, but its excessive stock price makes it extremely risky for conservative investors to invest in.