This Popular AI's Stock Bubble Could Burst In 2026

Two words that are often associated with each other are ‘AI’ and ‘bubble’. While many are convinced that AI spending is just another round of the dotcom bubble that burst in the early 2000s, the reality is that real profits are being made from AI, and the world’s largest tech companies are spending billions of dollars in cash flow to invest. Most of the spending is legitimate and the valuations are reasonable, but there are a few examples of companies that I think are actually in a bubble and could have a rough 2026.

One of them is Palantir Technologies (NASDAQ:PLTR). Palantir has been a great stock to own since the AI revolution began in 2023. Shares are up about 2,700% since then and have at least doubled every year since. That’s an incredible achievement, but it doesn’t quite match how the company is actually doing.

As a result, Palanitr is on my watchlist for a company whose bubble could burst in 2026. If you are a shareholder, consider taking action now.

Image source: Getty Images.

Palantir makes artificial intelligence-based data analytics software that allows users to make real-time decisions based on the most up-to-date information possible. Palantir’s original customer base was government customers, and it sold its products for military and intelligence uses, but there were also applications beyond that, such as resource distribution. Palantir has successfully served this unique customer base of government clients around the world. But there was a bigger market to conquer.

Palantir eventually expanded its offering to the commercial side of the business world and was equally successful. Both commercial and government revenues are important to Palanitr, with the third quarter revenue split being $633 million for the government and $548 million for the commercial sector. The revenue growth rates for each sector are equally impressive, with government revenues increasing by 55% and commercial revenues increasing by 73%. It’s clear that Palantir’s software is incredibly popular and rapidly adopted, as evidenced by its rapid growth rates.

Since the start of 2023, Palantir’s total revenue over the past twelve months has increased by 104%. That doesn’t match the 2,700% the stock is up, which makes me wonder if this stock is in a bubble.

Since the stock is rising much faster than revenue has been growing, it’s clear that the stock could be in an overvalued state. At 117 times revenue and 177 times forward earnings, I think this fact is borne out.

PLTR PS Ratio Chart — PLTR PS Ratio data according to YCharts.

Those are two incredibly expensive valuations to live up to. Most companies that trade for more than 100 times their turnover double or triple their turnover every quarter. Although Palantir’s revenue rose a whopping 63% in the third quarter, this is still far from the level needed to justify that valuation. Furthermore, Wall Street analysts predict that Palantir’s revenue growth will reach 42% by 2026. That’s far too slow a growth rate to justify such a premium, and Palantir’s first earnings report after its slowdown could be a big deal.

Another factor that could cause problems is Palantir’s profit margin. Most growing software companies are not profitable and have room to expand their margins. Palantir is not in the same boat; it posted an impressive 40% profit margin in the third quarter. That’s excellent work by management, but it will be difficult for Palantir to improve margins much further. As a result, it’s about as optimized for profit as it gets. So it will have to grow to its 177 times forward earnings valuation before it makes sense to buy here.

I think Palantir is an excellent company that should be studied and celebrated. What it has done is truly incredible. However, the stock has gotten too far ahead of itself and I think it is ripe for a major pullback to return to a more reasonable valuation area.

Consider the following before purchasing shares in Palantir Technologies:

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Keithen Drury has no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.

This Popular AI’s Stock Bubble Could Burst in 2026 was originally published by The Motley Fool