Palantir's Q2 Earnings: A Case for Long-Term Growth in Defense Tech and AI

Palantir Technologies (PLTR) delivered a blockbuster Q2 2025 earnings report, cementing its position as a leader in data analytics and defense technology. With revenue surging to $1.004 billion—a 48% year-over-year increase and a 14% sequential jump—the company not only shattered the $1 billion mark but also demonstrated its ability to scale efficiently while maintaining industry-leading profitability. For long-term investors, the question isn't whether Palantir can grow but whether its current 110x free cash flow (FCF) valuation is justified by its expanding government contracts, AI integration, and platform dominance.

The Engine of Growth: Government Contracts and AI Integration

Palantir's U.S. government segment remains its crown jewel, contributing $426 million in Q2 revenue—a 53% year-over-year increase. The landmark $10 billion, 10-year contract with the U.S. Army is a masterstroke, consolidating 75 smaller agreements into a single, enterprise-wide deal that generates up to $250 million in quarterly revenue. This contract not only provides predictable cash flow but also deepens Palantir's entrenchment in mission-critical systems, where its Gotham platform processes satellite imagery, sensor data, and real-time intelligence to enable predictive analytics. For defense clients, this means optimized resource allocation and reduced operational risk—a value proposition that's hard to replicate.

The company's AI strategy is equally compelling. Palantir's Artificial Intelligence Platform (AIP) is not just a tool but a competitive moat. By integrating large language models (LLMs) with its Ontology—a dynamic digital twin of an organization's data—Palantir delivers actionable insights at scale. Recent product launches like AI FDE, AI Workbench, and Ontology-as-Code have enhanced developer efficiency and customer retention. For example, TeleTracking uses Palantir's AI to streamline hospital operations, while Fannie Mae leverages the platform to detect mortgage fraud. These use cases highlight Palantir's ability to transform data into operational advantages, a critical edge in an era where AI adoption is the new battleground.

Profitability That Defies Skeptics

Palantir's financials are a masterclass in operating leverage. The company reported a 46% adjusted operating margin and a 57% FCF margin in Q2, significantly outperforming guidance. With $6 billion in cash and no debt, Palantir has the flexibility to reinvest in R&D, expand its commercial client base, or return capital to shareholders. Even with a 110x FCF multiple, the company's ability to generate $569 million in FCF for the quarter suggests that its valuation is less about speculative bets and more about tangible, recurring revenue from high-margin contracts.

Critics may argue that Palantir's reliance on the U.S. government (73% of revenue) is a risk, but this concentration is also its strength. The company's elite security credentials, including Impact Level 6 (IL6) accreditation, create a near-insurmountable barrier for competitors. While international commercial revenue dipped 3% year-over-year, Palantir's focus on U.S. commercial clients—where revenue grew 93% YoY—demonstrates its capacity to diversify within its core markets.

Benchmarking Against AI-Driven Disruptors: Palantir vs. Roblox

To understand Palantir's long-term appeal, consider its comparison with AI-driven disruptors like Roblox (RBLX). Roblox, a leader in user-generated content (UGC) and the metaverse, reported $1.1 billion in Q2 revenue with 111.8 million DAUs. While its AI initiatives—such as Cube 3D for 3D generation and RogueGuard for AI safety—are innovative, its business model remains unprofitable. Roblox's net losses narrowed in 2024, but its 418% free cash flow growth came on a $642 million base, dwarfed by Palantir's $569 million in FCF.

The key difference lies in margin structure. Roblox's gross margin of 77.76% is strong, but its operating margin remains negative at -29.52%, reflecting heavy R&D investments in AI and platform expansion. Palantir, by contrast, has achieved a 46% adjusted operating margin while scaling AI solutions. For investors, this underscores Palantir's ability to monetize AI in high-margin, mission-critical environments—a stark contrast to Roblox's reliance on user engagement and in-game purchases.

Is the 110x FCF Justified?

Palantir's valuation is undeniably rich, but its trajectory suggests it's paying for a company that combines the best of software and defense. The $10 billion Army contract alone adds $2.05 billion to its remaining performance obligations (RPO), providing years of visibility. With its AI platforms driving cross-industry adoption and a net dollar retention rate of 128%, Palantir is not just selling software—it's selling a strategic infrastructure layer for enterprises and governments to harness AI securely.

The risks are real: international expansion lags, and Q3 expenses will rise due to hiring costs. However, these are short-term headwinds for a company that raised its full-year revenue guidance to $4.142–$4.15 billion—a 36% YoY increase. For long-term investors, Palantir's ability to maintain its 57% FCF margin while expanding into commercial markets like healthcare and manufacturing could justify the premium.

The Verdict: A Compelling Buy for the Long Haul

Palantir's Q2 results reaffirm its status as a must-own stock for investors seeking exposure to the AI and defense tech sectors. While the 110x FCF multiple is lofty, it's supported by a business model that combines high-margin government contracts, AI-driven innovation, and a balance sheet with $6 billion in cash. In a world where data is the new oil, Palantir is not just a refiner—it's the infrastructure.

For those who question the valuation, consider this: Palantir's platforms are already generating $250 million in quarterly revenue from the Army alone, with no end in sight. As AI adoption accelerates and governments prioritize secure, mission-critical solutions, Palantir's moat only deepens. In this climate, the company's current valuation looks less like a gamble and more like a calculated bet on the future of enterprise AI.

Investment Takeaway: Buy and hold for long-term growth. Palantir's government contracts and AI platform provide a durable competitive edge, while its FCF generation supports reinvestment or shareholder returns. Investors should monitor international expansion and R&D efficiency but remain confident in the company's ability to scale profitably.