Data analytics company Palantir Technologies (PLTR 2.53%) has been on a tear recently, aided in part by yet another mind-boggling earnings report. In its second quarter, revenue growth surged, profit margin expanded, and guidance was given a big bump. The stock responded with a near-vertical move, rising about 7% in the trading day following the report and moving steadily higher in the days since.
With shares now up more than 130% year to date and 930% since the beginning of last year, Palantir has reached a valuation that simply looks unsustainable. Yes, the business is firing on all cylinders. But the stock may now be too hot to touch. Going further, it may even be time for shareholders to take some profits.
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Record-breaking quarter
The artificial intelligence (AI)-focused data analytics specialist's second-quarter revenue jumped 48% year over year to just over $1 billion, marking Palantir's first-ever billion-dollar quarter. Adjusted earnings per share rose 78% to $0.16, beating analysts' consensus forecast for $0.14. U.S. government contracts grew 53% to $426 million, while U.S. commercial revenue soared 93%, reflecting explosive demand for its AI platforms.
Palantir's remaining performance obligations, a measure of booked but not yet recognized revenue, also climbed sharply. The metric, which helps highlight continued demand for the platform, was up 77% year over year to $2.4 billion. Notably, this was a 27% sequential increase -- faster than the company's 14% quarter-to-quarter increase in revenue. Also worth noting, Palantir's net dollar retention reached nearly 128% in Q2, 400 basis points higher than last quarter, signaling strong expansion from existing customers.
"This was a phenomenal quarter," said Palantir co-founder and CEO Alex Karp in the company's second-quarter earnings release. "We continue to see the astonishing impact of AI leverage."
Overall, Karp cast the quarter as a breakthrough driven by AI tailwinds and strong government contracts, including a recently announced 10-year enterprise agreement with the Army, worth up to $10 billion in future spend.
The Palantir CEO's optimism isn't just marketing talk. Contracts with major enterprises and government agencies show Palantir's AI-driven solutions are becoming mission-critical.
With so much momentum, it wasn't surprising to see management raise its full-year guidance. The company now expects 2025 revenue to total $4.142 to $4.150 billion. In addition, Palantir said it now expects its full-year U.S. commercial revenue to surpass $1.3 billion, translating to a year-over-year growth rate of 85%. Importantly, management expects to achieve this growth while continuing to report net income each quarter of the year.
Time to take some chips off the table?
But rapid growth has a way of attracting not just new customers, but also sky-high expectations. Here's the tension caused by the high stock price: Palantir now trades at more than 300 times forward earnings and about 127 times trailing-12-month sales. That's multiples higher than Nvidia's lofty valuation ratios and well beyond most other software companies. Such valuations leave almost no room for execution missteps.
Palantir is indisputably delivering. Its AI platform's accelerating adoption, particularly in government and enterprise, underpins strong contract momentum and sticky customer relationships. But at these valuations, even minor stumbles could trigger sharp downside. For long-term holders, therefore, reducing exposure could make sense. Investors who choose to do this would take some chips off the table at a time in which they can lock in enormous gains -- and they could still benefit from their remaining shares if the company somehow continues to blow away expectations. For investors who have been on the sidelines, waiting for a pullback in the stock price is probably the best course of action. Buying a stock that trades at more than 300 times forward earnings estimates essentially leaves no room for error.
