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Unlike the previous two years, 2025 hasn't been a great time to be an investor in technology stocks. As of this writing, each member of the "Magnificent Seven" is down at least 10% year to date. On top of that, the tech-heavy Nasdaq-100 index has also fared quite poorly -- dropping roughly 11%.
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Yet in the midst of the volatile sell-off in the tech sector, one software growth stock stands out. Shares of Palantir Technologies (NASDAQ: PLTR) have gained 37% this year -- making it the best-performing stock in the Nasdaq-100 and a top-five performer in the S&P 500.
While these gains make Palantir stock look tempting right now, is the stock actually a good buy?
Taking a hard look at Palantir's valuation
The graph below illustrates changes in Palantir's market capitalization over the last three years. On the surface, the recent decline might look quite steep considering Palantir's market cap almost reached $300 billion earlier this year.
The notable sell-off in Palantir stock occurred in late February after the Department of Defense (DOD) announced that it was exploring cost-reduction opportunities in the U.S. defense budget. Given Palantir's close ties with the DOD and the fact that roughly half of the company's revenue comes from public sector contracts, investors initially met the Pentagon budget cuts with panic and fear.
Even though Palantir's stock price hasn't fully recovered, the most notable observation from the chart above is that the company's market cap has increased almost 18 times over the last couple of years.
Sure, artificial intelligence (AI) has been an important catalyst for Palantir as evidenced by its accelerating revenue growth and expanding profit margins. However, the company currently trades at a price-to-sales (P/S) multiple of 78. It's clear that Palantir has witnessed abnormal levels of valuation expansion in a short time frame, which may lead some to wonder whether the company can really keep up its momentum.
Earnings are coming up, and expectations are sky-high
One thing to know about stocks is that when the price keeps climbing, so do investor expectations. The chart below annotates Palantir's share price trends against quarterly earnings results for the last couple of years.
In April 2023, Palantir released a software suite called the Artificial Intelligence Platform (AIP). Over the last two years, AIP has helped Palantir accelerate revenue growth, expand profit margins, and speed up customer acquisitions. This strength has led investors to pour into the stock following each earnings report. To put this into perspective, Palantir reported 24% revenue growth in 2022 with $1.91 billion in sales. Last year, revenue grew 29% to $2.87 billion.