With Palantir’s stock price rising 280% this year, yet revenue only rising around 30%, there’s a clear disconnect between business growth and stock growth. Investors are now willing to pay more for Palantir’s business, which has caused its valuation to surge.

From a price-to-sales (P/S) standpoint, Palantir now trades for nearly 60 times sales.

The last time Palantir traded that high was in 2021, and the stock didn’t do well until over two years later. When Palantir reached its peak valuation in February 2021, the stock tumbled around 80% from its all-time highs.

It had nothing to do with the business, as revenue kept growing during that time frame.

This brings up an important reality for investors: Even though Palantir’s business is growing, the stock price can still drop.

Few companies have ever traded for 50 times sales and been a winning investment. That level of expectation is so high that only companies doubling or tripling their revenue year over year can justify it. Palantir’s revenue growth is only in the 30% range. While that’s not slow growth by any means, it’s far less than Nvidia saw during its major run.

Even though Nvidia has been tripling its revenue year over year for multiple quarters in a row, it has never traded for more than 45 times sales.

Yet, Palantir, which is growing much slower, has.

This doesn’t add up, and investors who own Palantir stock need to be careful. History may not repeat itself, but it does often rhyme. Palantir is a very expensive stock that isn’t putting up the results it needs to justify its valuation. Unless revenue starts doubling or tripling in the near future, it’s possible the company’s bubble could burst.

It may be months from now or even a year from now, but if Palantir keeps up its standard growth rates at its current valuation, the results won’t be pretty, and investors could be sitting on a loss like they were during 2021 and 2022.

So, what should investors do? I don’t think you need to sell every share of Palantir if you think it can go higher, but at least take some profits off the table. That way, you’ll still have captured some gains from this latest run.

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

Palantir’s Stock Just Did Something It Hasn’t Done Since 2021 was originally published by The Motley Fool