Palantir Sank Today -- Is the Stock a Buy?

Key Points

• Palantir stock pulled back 4.1% today amid a 0.8% decline for the Nasdaq Composite index.

• Investors sold out of tech stocks on the heels of valuations in the sector hitting record highs.

• The U.S. Senate approved a new tax and budget bill, but removed a provision that would have limited state-based artificial intelligence (AI) regulations.

• 10 stocks we like better than Palantir Technologies ›

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Palantir Technologies (NASDAQ: PLTR) stock took a step back in Tuesday amid broader sell-offs for the tech sector. The artificial intelligence (AI) leader's share price fell 4.1% in a daily session that saw the S&P 500 (SNPINDEX: ^GSPC) and the Nasdaq Composite (NASDAQINDEX: ^IXIC) fall 0.1% and 0.8%, respectively.

Trump and Musk feud, proposed pullback on AI regulations

Following fresh record highs for the S&P 500 and Nasdaq Composite yesterday, investors took profits on the market's recent rally. Tech stocks saw a particularly pronounced pullback, with signs that President Trump's feud with Tesla CEO Elon Musk has picked up again, adding downside valuation pressure to the tech sector. Palantir stock also sold off in conjunction with a significant new development on the regulatory front.

While the Senate voted to approve Trump's tax bill, it also removed a provision that would have prevented U.S. states from crafting their own AI regulations. Investors are generally betting that fewer regulations would be a bullish catalyst for Palantir and other artificial intelligence (AI) stocks, and the potential for states to craft their own legislative frameworks for AI caused investors to move out of the stock today.

Is today's sell-off an opportunity to buy Palantir stock?

Palantir's valuation pullback today highlights the potential for volatility created by the company's hugely growth-dependent valuation. There's no denying that the tech specialist has a strong position in the AI software space. It also seems clear that the company is on track to score big wins as demand catalysts continue to boost its performance in key markets.

At the same time, some very strong growth is still priced into the stock. Trading at roughly 83 times this year's expected sales and 234 times expected earnings, Palantir has one of the most growth-dependent valuations of any large, profitable company on the market. While I think there's a good chance long-term shareholders will see strong returns above current levels, the valuation profile suggests that investors should approach the stock with the understanding that even minor performance shortfalls for the business could cause huge volatility.

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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies and Tesla. The Motley Fool has a disclosure policy.

Palantir Sank Today -- Is the Stock a Buy? was originally published by The Motley Fool