Palantir’s “Perfect” Quarter Meets Harsh Reality: AI Darling Crashes After Record-Breaking Results

Palantir Technologies delivered another quarter of eye-popping growth, yet even record-breaking numbers couldn’t stop the stock from sliding. The data analytics and AI software firm beat across the board in Q3, posting revenue of $1.18 billion versus estimates of $1.09 billion and adjusted EPS of $0.21 against consensus of $0.17. Operating margins soared to 51%, and adjusted free cash flow reached $540 million. However, shares fell roughly 7% in Tuesday’s premarket session, suggesting that investors—already sitting on triple-digit gains year to date—are reassessing valuation risk in the broader AI complex. Palantir, the fifth-best performer in the S&P 500 this year, has become both the poster child and the pressure valve for the sector’s exuberance. The headline numbers were staggering by any conventional software metric. Total revenue grew 63% year over year, marking the second straight quarter above the billion-dollar threshold. U.S. revenue surged 77% to $883 million, while international sales grew a modest 10%. Government revenue rose 52% to $633 million, continuing the company’s deep entrenchment in defense and intelligence contracts, while commercial revenue jumped 90% to $548 million, underpinned by explosive 121% growth in the U.S. commercial segment. That part of the business generated $397 million in sales during the quarter, and management now sees it exceeding $1.43 billion for FY 2025—more than double last year’s level. The company closed $2.8 billion in total contract value bookings, up 151% year over year, with 204 deals exceeding $1 million. Customer count rose 45% to 911, with average trailing-12-month revenue from the top 20 customers up 23% to $83 million each. Profitability metrics also hit new heights. Palantir reported GAAP net income of $476 million, equating to $0.18 per share, compared with $143 million a year earlier. Adjusted EBITDA reached $606 million, easily topping expectations, while gross margin stayed a lofty 84%. The company’s “Rule of 40” score—revenue growth plus operating margin—soared to 114%, a 20-point jump from last quarter and arguably the highest in the industry. Palantir ended the period with $6.4 billion in cash and short-term Treasuries, leaving it comfortably self-funded. CFO David Glazer called the performance “our highest ever by 20 points,” while flagging Q4 guidance of $1.33 billion in revenue and operating margins above 52%, both ahead of Wall Street estimates. CEO Alex Karp characteristically wrapped hard numbers in philosophy. “These are not normal earnings,” he declared, arguing that Palantir’s combination of rapid growth and profitability defies conventional frameworks. He credited “the American worker” and described the company’s relationship with clients as “a tribal understanding” that grants “a massive unfair advantage.” In his shareholder letter, Karp mocked skeptics “left in a kind of deranged and self-destructive befuddlement,” claiming Palantir has given retail investors returns once reserved for top venture capitalists. Yet even as he boasted of the firm’s role in empowering the “American warfighter,” investors were selling—the stock fell nearly $2 as he spoke on the call. The dissonance underscored the market’s dilemma: spectacular execution, but expectations priced beyond perfection. The company’s U.S. dominance remains both its engine and its vulnerability. While domestic growth, particularly in commercial AI deployments, is accelerating at triple digits, Europe and other international markets continue to stagnate. RBC Capital Markets highlighted that international commercial growth of just 10% is masking structural limits, with the bulk of bookings coming from multi-year U.S. contracts that could front-load future demand. Analysts at RBC maintained an Underperform rating and raised their target to $50 (from $45), arguing that Palantir’s valuation—trading at 48× forecast free cash flow and over 200× 2026 EPS—remains stretched. By contrast, BofA reiterated a Buy rating and lifted its target to $255, praising the company’s “red-pill” approach of deep integration, ontology-based design, and ROI-driven deployment versus competitors’ “blue-pill” ChatGPT wrappers. Beneath the showmanship, Palantir’s operational story continues to hinge on adoption of its Artificial Intelligence Platform (AIP). CRO Ryan Taylor noted that the quarter’s 63% top-line growth and 18% sequential increase stem from accelerating enterprise-wide deployments. He highlighted record sales cycles and contract expansions—one medical device maker boosted its annual contract value eightfold within five months. CTO Shyam Sankar pointed to AI Hivemind and the company’s native AI development agents as key differentiators, illustrating how two human engineers “spawned an army of AI FDEs” to migrate a client off its legacy system in five days. He also revealed the U.S. Army plans to consolidate on Palantir’s Vantage platform, a major vote of confidence in its defense applications. Looking ahead, management raised full-year guidance across the board. Revenue is now expected to hit $4.398 billion at the midpoint, up 53% from last year and $250 million above prior forecasts. Adjusted income from operations is projected between $2.15 and $2.16 billion, and free cash flow between $1.9 and $2.1 billion. The company expects GAAP profitability in every quarter of 2025. Management also acknowledged that expenses will rise into Q4 due to continued investment in technical talent and product development, but insisted discipline remains a core cultural tenet. As CFO Glazer put it, “we remain committed to investing in the product pipeline and the most elite technical talent.” Despite the stellar fundamentals, the valuation debate now dominates. The stock has soared 173% this year, trading at roughly 248× forward earnings and 88× sales, a multiple that even mega-caps like Nvidia would find hard to justify. Retail investors remain fervently loyal, but institutional money is starting to pare exposure to the frothiest AI names. As one analyst quipped, “the stock is priced for divinity in a world that still has gravity.” Karp himself hinted at the same dynamic in his CNBC interview: “The strong companies are going to get much stronger, and the people pretending they’re doing stuff are going to disappear very quickly.” For now, Palantir finds itself caught between the legend and the math. The business is thriving at a pace few software companies have ever matched, with margin and cash flow expansion that would make even Nvidia jealous. Yet as AI stocks face their first collective valuation reckoning, Palantir is learning the same lesson as its own algorithms: even perfect data doesn’t guarantee a perfect output. The company may have delivered “arguably the best results any software company has ever delivered,” as Karp claimed—but the market is deciding how much that’s worth in the real world.