This title’s epic run reminds me of Microsoft in the late 1990s.
Did any S&P 500 stock have a better year this year than Palantir Technologies (PLTR -3.72%)? The stock is up 360% since the start of 2024 as I write this, producing outsized investment returns for virtually every portfolio it touches.
I don’t want to be pessimistic, but maybe it’s time to share a word of caution about stocks that behave this way. Palantir benefits from legitimate growth drivers in the artificial intelligence (AI) space, particularly its AIP platform for deploying AI applications in the public and private sectors. However, its fundamentals have not kept up with the stock price.
History doesn’t always repeat itself, but you can learn from it. Microsoft (MSFT -1.73%) one of the largest and most influential companies today, experienced a similar situation over 20 years ago.
Below, I’ll explain what happened to the stock back then and why Palantir’s similarities to Microsoft make it arguably the biggest potential bankrupt of 2025.
Go back in time to the turn of the millennium
You may have heard that AI is the most important technology since the Internet arrived in the late 1990s. That might be true. However, the stock market tends to get ahead. The Internet craze of the late 1990s fueled a stock market bubble that finally burst in the early 2000s. Microsoft became one of the hottest stocks on Wall Street in the mid-1990s thanks to the success of its Windows computer operating system.
The stock has seen a massive rise that has inflated its valuation to astronomical levels. At its peak, Microsoft stock traded at a price-to-sales (P/S) ratio above 31:
PS MSFT Ratio data by Y Charts
It can be difficult to appreciate valuations when they are just numbers on a chart. To be clear, paying 31 times a company’s total revenue for its stock is expensive. Mathematically, an investor who buys stocks at this valuation waits 31 years for the company (not counting revenue growth) to repay their investment with money from sales. By the way, these are not profits, they are sales!
This is a terrible return on investment; you wait many years to get your money back, even if the business is growing rapidly. Unfortunately, investors don’t think of these terms when emotions like greed and euphoria run rampant.
As you know, Microsoft grew in the 1990s and became arguably the largest and most important technology company in the world. But how did the purchase at the highest valuation level of the stock take place?
The stock crashed due to its unrealistic valuation and took around 18 years to reach new highs. Once again, Microsoft’s business continued to grow; its revenues increased by more than 330% during those 18 years.
Could Palantir be a worse bubble than Microsoft?
It’s hard not to see some similarities between Microsoft back then and Palantir today. Palantir’s Artificial Intelligence Platform (AIP) has arguably become the leading software platform for deploying AI applications. However, like Microsoft a few years ago, market enthusiasm pushed the stock to unrealistic heights.
Surprisingly, Palantir’s P/S ratio has gone parabolic, reaching more than double Microsoft’s peak in the late 1990s:
PS PLTR report data by Y Charts
Palantir will generate approximately $2.8 billion in revenue this year and its market capitalization has reached $187 billion. That’s worse (almost twice as expensive) than when zero percent interest rates fueled a stock market bubble just a few years ago.
Ultimately, no one can time the market. Stock prices can do funny things for longer than you think.
But the music will stop. This is always the case when valuations go parabolic.
When the time comes, it will probably hurt. Investors who buy into the parabolic bullish momentum of recent months could experience a prolonged period of mediocre returns as the stock’s valuation declines – even if the company grows, much like Microsoft investors did .
Given Palantir’s nearly 400% returns in 2024, these circumstances make it a prime candidate to be the ultimate 2025 bust.
Justin Pope has no position in any of the stocks mentioned. The Motley Fool ranks and recommends Microsoft and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
