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Palantir defies gravity: Can AI dreams sustain sky-high valuations?
Jacob Falkencrone
Global Head of Investment Strategy
Key points:
- Palantir’s record-breaking results are fuelled by explosive growth in commercial AI contracts and sustained government deals, positioning it as an AI frontrunner.
- Current valuation is very high implying nearly flawless execution for years ahead, leaving almost no margin for error.
- Investors should remain vigilant, closely monitoring growth sustainability, profitability metrics, and valuation sanity, as even minor setbacks could significantly impact the stock.
Every stock market era has its rocket ships—the companies investors hitch their hopes to, believing gravity no longer applies. Tesla had its day, Amazon famously soared before justifying its value, now it’s Palantir Technologies that finds itself in this rarefied air, propelled by the intoxicating promise of artificial intelligence.
Palantir’s shares have surged an eye-watering 567% over the past year, making it one of the most talked-about growth stocks out there. Yet even the most powerful rockets must eventually confront the laws of physics. With its latest blockbuster earnings report, investors must ask: can Palantir continue defying gravity, or will reality inevitably pull it back down?
A landmark quarter: AI pushes Palantir to new heights
Palantir crossed a critical threshold this quarter, posting its first-ever billion-dollar revenue, smashing analyst expectations. Revenues soared to USD 1.004 billion, a 48% leap year-over-year, significantly surpassing forecasts of USD 940 million.
CEO Alex Karp, known for his bold rhetoric, called the results "a once-in-a-generation event," driven by an "astonishing impact" of artificial intelligence. Not mincing words, he added with characteristic bravado, "We are sorry that our haters are disappointed—but there are many more quarters to disappoint them, and we're working on that too".
Commercial engine roars: The pivot from Pentagon to private sector pays off
Once defined by its close relationship with the Pentagon, Palantir is increasingly turning commercial—particularly in the US, where business revenue surged 93% this quarter to USD 306 million. Major deals with blue-chip firms such as Citibank, Panasonic Energy, and GE Aerospace underscored a growing shift toward enterprise adoption of Palantir’s AI solutions.
Yet government contracts remain pivotal. The standout this quarter: a transformative USD 10 billion, ten-year contract with the US Army consolidating 75 separate agreements. This highlights Palantir's unmatched influence in defence modernisation and its secure foundation for future revenues.
“Palantir isn’t just a government vendor anymore—it’s becoming an indispensable partner for enterprises in the AI revolution.”
Rare air of profitability: Margins and cash flow match growth ambitions
Unlike many high-growth tech firms burning cash to scale, Palantir delivered strong profitability, with adjusted operating margins of 46% and adjusted earnings per share of USD 0.16—above expectations of USD 0.14. The company's "Rule of 40" score, combining growth and profitability, soared to a stellar 94, significantly outperforming tech industry norms.
Sky-high valuation: Real promise or speculative mania?
Here’s the catch: Palantir’s valuation is now stratospheric, currently trading at roughly 80 times projected next-year revenue and at a P/E level of staggering 239—far surpassing valuation peaks of historic high-flyers like Tesla, Alphabet, or Salesforce.
CEO Alex Karp argues Palantir can expand its US revenues tenfold in five years, implying revenues of around USD 13 billion domestically alone. But even under this ambitious scenario, today’s valuation remains extremely lofty. Investors are essentially betting Palantir will dominate an AI market that hasn't fully matured yet.
“At 80 times forward revenue, Palantir investors aren't merely optimistic—they’re betting on an unprecedented, near-perfect execution of an AI vision.”
Analysts remain cautious; fewer than a third currently have buy ratings, highlighting significant scepticism over the sustainability of current valuations.
Investors beware: Clear skies today don’t guarantee turbulence-free tomorrow
Investors, particularly latecomers, must remain vigilant about these risks:
- Over-reliance on the US market: More than 70% of Palantir’s revenue still comes from the US International expansion remains modest, potentially limiting long-term global growth.
- Execution risks: The higher Palantir climbs, the less room it has for error. Missteps in new customer acquisition, slower-than-anticipated AI adoption, or competitive disruptions could spark severe revaluation.
- Government dependence: Despite accelerating commercial business, a significant portion of revenue comes from politically sensitive government contracts vulnerable to policy changes or public backlash.
“Palantir’s trajectory is thrilling—but at these altitudes, even minor setbacks could trigger dramatic descents.”
Balancing AI excitement with rational vigilance
Retail investors must balance their enthusiasm for Palantir’s AI-driven potential with clear-eyed realism about valuation risk. Here’s what to watch closely:
- Continued explosive growth in commercial contracts—especially beyond the US—is essential to sustain the story.
- Profitability and cash flow discipline—investors must scrutinise operating margins and cash generation to ensure that Palantir remains financially resilient amid rapid expansion.
- Valuation reality checks—continuously reassess whether the stock’s valuation realistically reflects Palantir’s future potential, or if exuberance is overshadowing fundamentals.
“Palantir is riding an extraordinary wave. Investors need steady nerves, disciplined expectations, and a readiness for volatility. Remember: even the strongest waves eventually crest.”
Can Palantir stay airborne?
Palantir’s Q2 results undeniably demonstrate the immense transformative power of enterprise AI, underscoring why investors have propelled shares skyward. Yet, the rarefied valuation leaves virtually no margin for error.
While it’s tempting to believe this rocket can keep climbing indefinitely, history reminds us otherwise. Ultimately, investors must ask themselves: can Palantir deliver perfectly on the extraordinary promises now priced into the stock—or will reality eventually reassert itself?
Gravity may seem distant today, but investors would be wise not to forget its existence altogether.
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