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Palantir Technologies just reported its quarterly earnings, and on paper, they look fantastic. Revenue up 39% to $884 million in one year. Profits doubled to $214 million. Commercial revenue in the US soaring 71%. They even raised their outlook for the rest of the year.
So why did their stock drop 9% after the announcement?
Welcome to the fascinating world of market expectations, where sometimes being “good” just isn’t good enough.
The Expectation Game
Palantir has been Wall Street’s golden child this year. Its stock has surged 64% since January, making it the best performer in the entire S&P 500. That kind of momentum creates enormous expectations.
When you’re trading at over 200 times earnings (yes, you read that right), investors expect nothing short of miracles. Meeting earnings expectations and beating revenue projections by just 2.5% doesn’t cut it.
As analyst Gil Luria put it, “The only thing that’s higher than the results reported were expectations, and that’s why the stock is down.”
But What Does Palantir Actually Do?
Before we dive deeper, let’s clarify what Palantir does. Founded in 2003 by Peter Thiel and Alex Karp, the company builds software that helps organizations analyze massive datasets. It started primarily serving intelligence agencies and defense departments but has expanded into the commercial sector.
Today, Palantir positions itself as “the operating system for the modern enterprise in the era of AI.” Essentially, they provide the software infrastructure that helps companies and governments implement AI across their operations.
The Two Engines of Growth
Palantir’s business has two main segments, and both are firing on all cylinders:
Government: This segment grew 45% to $373 million. The US government remains Palantir’s largest customer, representing 42% of total revenue. Recent wins include a $178 million contract with the US Army for AI-enabled military trucks and a $30 million deal with Immigration and Customs Enforcement.
Commercial: This is where things get really interesting. US commercial revenue jumped 71% to $255 million. This segment is growing so quickly that it’s becoming a larger piece of Palantir’s business with each passing quarter.
The AI Stampede
CEO Alex Karp has a colorful way with words. He described the demand for Palantir’s AI tools as a “ravenous whirlwind of adoption” and a “stampede.”
And the numbers back him up. Palantir closed 139 deals worth at least $1 million during the quarter (up 60% from last year), with 31 of those exceeding $10 million.
Even more telling is their “remaining deal value” – essentially their backlog of future revenue – which has grown 127% to $2.3 billion. That’s a strong signal that growth isn’t slowing down anytime soon.
The Trump Factor
Palantir occupies an interesting spot in the current political landscape. President Trump’s administration has launched the Department of Government Efficiency (DOGE), led by Elon Musk, aimed at cutting federal spending.
Some government contractors like IBM and Accenture have already warned about impacts from these cost-cutting efforts. But Palantir seems unfazed.
When asked about potential cuts, Palantir’s CFO David Glazer said: “Focus on efficiency is excellent for Palantir. We very much support a push by the U.S. government to push on efficiency across the government.”
There’s a good reason for their confidence. While some government spending may be cut, the Trump administration has also proposed increasing the Pentagon’s budget by 13% next year, with a significant focus on AI technology – Palantir’s specialty.
The Onshoring Opportunity
Another tailwind for Palantir comes from an unexpected source: tariffs. Recent tariff decisions are pushing more companies to bring manufacturing back to the US.
As these companies build new facilities, they need sophisticated software to optimize operations – creating new opportunities for Palantir’s commercial business.
The Profitability Picture
Beyond revenue growth, Palantir’s profitability is improving too. Their adjusted operating margin expanded to 44%, up from 36% a year ago.
However, there’s a caveat. Palantir spends heavily on stock-based compensation – $155 million in Q1 alone. This expense isn’t reflected in their adjusted earnings, which is something investors should keep in mind.
The Valuation Question
This brings us to the elephant in the room: Palantir’s valuation. The company trades at roughly 220 times this year’s expected earnings. That’s stratospheric by almost any standard.
Even the most bullish investors have to wonder if any company – no matter how promising – can justify such a premium valuation. A slight disappointment or growth slowdown could trigger a significant correction.
The Bottom Line
Palantir is executing brilliantly as a business. Its growth is accelerating, margins are expanding, and both government and commercial segments are thriving.
But in the short term, stock performance isn’t just about business execution – it’s also about meeting or exceeding market expectations. And when those expectations reach the clouds, even excellent results can seem disappointing.
For investors, the question isn’t whether Palantir is a good company – it clearly is. The question is whether any company growing at 40% with improving margins deserves to trade at 220 times earnings.
That’s a question each investor will have to answer for themselves.
