Palantir Technologies (PLTR) stock has surged by nearly 2,000% since early 2023, riding the wave of euphoria surrounding artificial intelligence (AI) and its unique products. However, while many investors are captivated by the company’s promises and early profitability, clear warning signs suggest that this “next big thing” might be headed for a painful correction. Is Palantir building a bubble that could burst, sending its stock plummeting by 60% or more?

The enthusiasm for AI on Wall Street mirrors past periods of overexcitement for groundbreaking technologies. If once Intel, Microsoft, or Nvidia were considered the trailblazers, today Palantir takes headlines as an “AI-driven data mining expert.” The company, whose market capitalization reached $317 billion as of July 3rd, offers essential Software-as-a-Service (SaaS) solutions: its Gotham platform assists governments with data collection and military mission planning, while Foundry helps businesses understand and optimize their data. Palantir’s operating cash flow appears secure and stable, and its shift to recurring profitability surprised analysts’ expectations. However, seven key reasons indicate that Palantir’s meteoric success could be a short-lived “Fear Of Missing Out” (FOMO) event, and its stock is exposed to significant risks.

Reasons Why Palantir’s Stock Might Plummet

“Next Big Thing” Technology Bubbles

History shows that investors tend to overestimate the speed at which breakthrough innovations will translate into widespread business benefits. Every technology deemed the “next big thing” over the past three decades, including the internet itself, eventually experienced a bubble burst. Since most businesses have yet to see a positive return on their AI investments, it’s reasonable to assume this sector will follow a similar trajectory to previous groundbreaking technologies. While Palantir’s contracts may cushion the blow to its sales, they won’t save the stock from a wave of negative investor sentiment.

Limited Growth Ceiling for Gotham

The Gotham platform is currently the primary driver of Palantir’s profitability and growth rate. However, its customer base is quite limited. Because it provides sensitive data collection and military mission planning services, it’s not available to countries like China and Russia, or a long list of other non-U.S. allies. This significantly lowers Gotham’s long-term growth ceiling, more than investors might realize.

Trump Administration’s Focus on Government Efficiency

While a Republican administration is generally seen as positive for defense companies due to a preference for aggressive defense spending, President Donald Trump’s campaign promise to make Washington D.C. more efficient casts a shadow over the future of federal expenditures. There’s no guarantee that a Trump administration won’t seek to reduce federal spending in the future, and there’s little visibility on what defense spending will entail beyond Trump’s four-year term.

Poor Earnings Quality

Despite Palantir’s shift to profitability, a deeper analysis reveals a less rosy picture. Last year, 40% of the company’s pre-tax income, totaling $489.2 million, came from interest income on its cash pile. In the first quarter of 2025, this figure stood at 23%. While there’s nothing inherently wrong with generating interest income, a significant portion of the company’s pre-tax income is derived from a non-innovative and unsustainable source, indicating lower earnings quality than what appears on the surface.

Dilutive Share-Based Compensation

Share-based compensation, including stock grants and options, serves to retain talent and incentivize the achievement of growth targets. However, in Palantir’s case, ongoing share-based compensation leads to a steady increase in the number of outstanding shares, which has a dilutive effect on existing shareholders. While AI euphoria has so far masked this dilutive impact, history suggests this situation is unlikely to persist for an extended period.

Consistent Insider Selling

Since its Initial Public Offering (IPO) in September 2020, insiders (executives and directors) have sold over $7.4 billion worth of Palantir stock. While some sales are due to covering taxes on share-based compensation, a single purchase of 10,000 shares by a former senior executive in May 2025 was the only purchase made by an executive or director in 57 months. The absence of purchases from insiders, who know the company best, should raise a red flag for potential investors.

Unsustainable Valuation

The price-to-sales (P/S) ratio is a key metric for valuing growth companies. Mega-cap companies at the forefront of “next big thing” trends, such as Microsoft, Amazon, Cisco, and even Nvidia at its peak, reached P/S ratios ranging from 30 to 43. Palantir’s stock, however, ended the previous week with a P/S ratio of over 107 for the past 12 months – three times higher than other mega-cap companies before their bubbles burst. Even with optimistic sales forecasts for the future, Palantir’s current valuation is historically unsustainable, and it’s only a matter of time until Wall Street and investors realize this.

Palantir’s meteoric success is striking, but a combination of historical, operational, and financial factors suggests its downside potential is significant. Will history repeat itself, and the bubble surrounding Palantir’s stock burst, or will this time be different? Investors should carefully consider these risks before jumping on the Palantir AI bandwagon.