Palantir Technologies (PLTR 0.62%) has given investors a fresh reminder that momentum cuts both ways. After a stunning run earlier this year, the software company behind data-integration and AI (artificial intelligence) platforms for governments and enterprises has seen its share price slide more than 15% from levels earlier this month.
That kind of pullback naturally tempts investors. Is this a buy-the-dip opportunity?
There's certainly a lot to like. The business is growing quickly, and management recently raised its outlook. But there's still one big problem: The growth stock's valuation remains incredibly high.
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Rapid growth already priced in
To be fair, Palantir's growth isn't your average growth. The tech company's third-quarter revenue grew 63% year over year to $1.18 billion, a significant acceleration from the prior quarter. U.S. revenue rose 77% year over year in the period, and U.S. commercial revenue, specifically, surged 121% year over year as customers expanded early projects into broader deployments. With commercial revenue representing enterprise spend on its platform, the company is clearly diversifying away from its heavy reliance on the U.S. government. Though investors shouldn't count out U.S. government revenue, which grew at a solid rate of 52% year over year.
Management now expects fourth-quarter revenue to grow about 61% year over year and has lifted its full-year 2025 revenue outlook to about 53% growth, while also calling for strong adjusted free cash flow for the full year of between $1.9 billion and $2.1 billion. Those figures highlight how Palantir is not just growing fast; it is doing so while generating tons of cash.
That combination of torrid growth and improving profitability has turned Palantir into one of the market's highest-profile AI software names.
A crowded field with better options
But with so much growth and profit in this space, competition wants in on it. Direct competitors Snowflake (SNOW 4.34%) and privately held Databricks, for instance, have been doubling down on AI. And Snowflake, in particular, seems willing to spend just about any amount to compete effectively. The company's operating expenses in its most recent quarter exceeded $1.1 billion, or nearly 100% of the period's revenue. At the same time, deep-pocketed hyperscale cloud providers have their own AI data cloud offerings.
Additionally, it's worth noting that competing tech giants like Microsoft and Amazon have meaningful structural advantages -- and a war chest of cash isn't the only one. Each operates an enormous cloud business and has a more diversified business. Palantir, by contrast, remains a much smaller business with far fewer resources, tied to a focused family of platforms. And Palantir still generates a large portion of its revenue from government contracts, which can be lumpy and exposed to shifting political priorities.
NASDAQ: PLTR
Key Data Points
But the biggest risk to the stock isn't competition or customer concentration -- it's valuation. The business is executing well, but the share price already assumes that exceptional growth and strong economics will persist for many years. A forward price-to-earnings ratio of more than 165 as of this writing doesn't leave much margin of safety if AI spending normalizes, or if customers start favoring competing platforms from cloud providers that bundle their AI data clouds with other services.
Palantir's story is undeniably interesting. The company is growing quickly and generating meaningful free cash flow, while also winning sizable commercial deals on top of a long history of government work.
The issue, however, is price. Even after the recent sell-off, the stock looks stretched. Owning Palantir here would require confidence that it can sustain very high growth and fend off well-capitalized rivals while navigating any shift in government or enterprise budgets without a major reset in its valuation.
Given that trade-off, staying on the sidelines may be the best idea for those considering buying this dip in the stock price. Investors looking to build AI exposure can find alternatives with lower valuations and broader business lines, including the large cloud providers that already sit at the center of enterprise technology budgets. Until Palantir's price better reflects the real competitive and execution risks it faces, the stock is probably worth avoiding.
