Can Palantir stock continue to climb after soaring 361% in just one year? History provides a clear answer.

Artificial intelligence (AI) has become the next big trend in the past two years. In the capital market, Megacap technology stocks have attracted attention and hype from lions related to the AI ​​prospects.

But some smaller players prove that they can compete with large tech, too. I can't think of a better example than an enterprise software developer Palantir Technology (NASDAQ: PLTR)Its stock has soared 361% over the past year (as of May 6).

Although Palantir has become one of the most popular AI stocks, Smart Investors wonders if the company's parabolic stock price can last. Let us explore its assessment trends and compare these dynamics to share the behavior of other important historical events in the technology field. From there, it should be clearer about which direction the stock can develop.

In just one year, Palantir's market value increased from about $46 billion to more than $250 billion.

YCHARTS's PLTR market value data.

As of this writing, the company's price-to-sales ratio (P/S) is approximately 91. Looking at this number in isolation doesn’t tell us much, so let’s consider it in some notable examples in the history of the technology sector.

A financial analyst who is working on stock charts.
Image source: Getty Images.

A few months ago, Sean Williams, my Fool.com contributor, wrote a surprising article citing valuation trends during the internet bubble and the current AI revolution, which he then indexed in the case of targeting Palantir.

Prior to the interaction crash, the price to sales ratio of hot names, e.g. Cisco and Amazon Achieved a peak of 40. What is this similar Nvidia During the entire AI boom, its price-to-earnings ratio reached 46 of the past few years.

Yes, Palantir's P/S is now more than double the number of some leading technicians trading during the obvious stock market Euphoria period.

From this perspective, it is obvious that Palantir's valuation is too tight. However, investors still need to consider what happened during the Internet boom and the latest trends in the AI ​​arena in order to better understand the possible progress of stocks.

As of this writing, Cisco, Amazon and Nvidia trades are 4.4, 3.1 and 21.6, respectively. At a very high level, I think the historical context here strongly suggests that Palantir's valuation multiples may start to compress significantly.

While such a concept may inspire some panic sales, I wouldn't encourage action on this emotion. I say this because it is completely reasonable to normalize the valuation multiple in the long term. As the company matures, so does its valuation ratio. In other words, as sales and profits grow, the company's market value also grows, so the valuation multiple begins to go smoothly.

CSCO Market Value Chart
YCHARTS's CSCO market value data.

Furthermore, just because the valuation multiple starts to compress does not necessarily mean that the company's market value will decline. Compared to multiples of Internet reproduction 26 years ago, Amazon is a more valuable business today than it was 26 years ago.

Although Cisco's valuation has never fully recovered, the company's current market value of $236 billion is still far exceeding the mid-2000s. This underscores the idea that long-term holding of stocks (years or even decades) can lead to huge gains.

In addition, NVIDIA's market value is more than twice that of two years ago, when its P/S reached about 46.

NVDA Market Value Chart
YCHARTS's NVDA lower limit data.

One of the main differences between Palantir and the example above is that I don't think the AI ​​department is in the bubble. I think the growth prospects for Palantir are much clearer than those of Cisco or Amazon in the Dot-Com era, thanks in large part to the soaring demand for AI software. Although this suggests that its long-term outlook is strong, I still encourage investors to understand the opportunity cost of investing in a company at a historic valuation.

While history shows that Palantir can eventually eclipse its current $250 billion market value well, there is also a lot of evidence that it will trade at a more reasonable price at some point. For investors who want to build a position in it, I think the best strategy to use is the average dollar cost. I would say that in order to make the most of this investment, they should be ready to hold stocks for many years.

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John Mackey, former CEO of Amazon's subsidiary Whole Foods Market, is a member of the board of directors of Motley Fool. Adam Spatacco has positions at Amazon, NVIDIA and PALANTIR Technologies. Motley Fool is in the location and recommends Amazon, Cisco Systems, Nvidia and Palantir Technologies. Motley Fool has a disclosure policy.

Can Palantir stock continue to climb after soaring 361% in just one year? History provides a clear answer. Originally published by Motley Fool