After a run that has already transformed the stock this year, Palantir (PLTR 1.54%) just put up the kind of quarter bulls wanted to see. Yet shares fell sharply the day after the report, as investors balanced record results with a sky-high valuation -- a familiar tension for this stock.
The data analytics specialist sells software that helps governments and enterprises turn sprawling data into decisions. That may sound abstract. But Palantir's quarterly numbers are not. Management provided big guidance for Q4 and lifted its full-year outlook, highlighting accelerating adoption of the company's AI platform -- particularly in the U.S. commercial business. The results reminded investors that the artificial intelligence (AI) data platform specialist commands a jaw-dropping valuation for a reason.
But has the valuation multiple soared too high, too fast?
Image source: Getty Images.
Staggering momentum
Once again, there's no denying Palantir's business momentum. Third-quarter revenue of about $1.2 billion rose 63% year over year, with adjusted earnings per share of $0.21 -- up from 0.14 in the year-ago quarter. Helping drive the quarter, U.S. revenue climbed 77%, and U.S. commercial revenue jumped 121%, reflecting broader artificial intelligence platform (AIP) deployments and larger deal sizes. Palantir also closed deals on a record $2.76 billion in total contract value and guided for $1.33 billion in fourth-quarter revenue while raising its outlook for full-year revenue.
With such incredible momentum, Palantir now expects full-year revenue of about $4.4 billion, up from a previous forecast for revenue of about $4.15 billion.
"We are yet again announcing the highest sequential quarterly revenue growth guide in our company's history," Co-Founder and CEO Alex Karp said, framing the quarter as further evidence of AIP's ability to leverage the power of AI for its customers.
Why the valuation still matters
So, why would shares fall after a report like this? Palantir's valuation multiple remains extreme -- even for a fast-growing software company. As of this writing, Palantir has a forward price-to-earnings multiple of more than 200 -- a level that assumes rapid compounding for years to come. Further, the company's price-to-sales ratio sits north of 130.
NASDAQ: PLTR
Key Data Points
Just how wild is this valuation? Comparisons help. Microsoft (MSFT 1.44%) deserves a high valuation multiple for its excellent combination of rapid growth, robust margins, and a diversified and durable business -- spanning operating systems, cloud, productivity, and developer tools. Yet its price-to-sales ratio sits at less than 14 -- a fraction of Palantir's. Yes, Palantir is demonstrating far faster growth than Microsoft's, but the bigger software giant's business is arguably more predictable and durable over the long haul. So, it's tough to justify such a wide disparity.
What could close the gap
To live up to its extraordinary valuation, Palantir will need to do two things. First, it needs to sustain its commercial momentum throughout next year -- any deceleration would likely spook investors. Second, Palantir needs to demonstrate operating discipline as revenue climbs, translating top-line growth into substantial operating margin expansion.
Even in light of the company's impressive momentum, these outcomes aren't a given. Palantir still carries meaningful exposure to U.S. federal budgets and defense programs, which can create timing volatility even in supportive spending environments. Further, even if Palantir delivers, shares could still suffer. That's just a symptom of a valuation like Palantir's. Of course, the company has a reputation for exceeding expectations -- and it could exceed mine -- both with its financial and stock price performance. Still, the valuation risk is simply too high for me personally.
Overall, Palantir's quarter was excellent, and its guidance suggests more of the same into year-end. And given the company's 140% year-over-year growth in total contract value during the quarter, the setup for 2026 looks great, too.
But until the fundamentals backfill the stock's hot valuation, the story hinges less on whether the business is working and more on how much is already priced in.
So, what should investors do now? Despite Palantir's clear business momentum, I'd stay on the sidelines and look for investment ideas in which I can justify the valuation. I just can't get there at this price.
