Is Palantir's Sky-High Valuation Sustainable Amid AI Sector Cooling and Short-Seller Pressure?

In the volatile landscape of 2025, Palantir Technologies (PLTR) stands as a paradox: a company with stellar financial performance yet trading at a valuation that defies conventional logic. With a forward P/E ratio exceeding 200 and a price-to-sales (P/S) multiple of 25x, Palantir's market capitalization has surged to hundreds of billions, fueled by its dominance in government contracts and AI-driven solutions. However, as the AI sector cools and short-sellers target its lofty multiples, the question looms: Is Palantir's valuation rooted in realism or hype?

A "Beat and Raise" Quarter, But at What Cost?

Palantir's Q3 2025 results were nothing short of extraordinary. The company reported $1.18 billion in revenue, a 63% year-over-year increase, with U.S. commercial revenue surging 121% to $397 million and U.S. government revenue rising 52% to $486 million, according to an El Balad report. Adjusted earnings per share (EPS) hit $0.21, surpassing estimates by 110%, and the company raised its full-year revenue guidance to $4.396–$4.400 billion, per the El Balad report. These numbers, coupled with landmark deals like a $10 billion U.S. Army contract and a £1.5 billion U.K. defense partnership, have justified its premium valuation in the eyes of bulls.

Yet, the market's reaction to these results was jarring. Despite the "beat and raise" quarter, Palantir's stock tumbled 7% in premarket trading on November 3, 2025, and continued to decline in after-hours sessions, as noted in a a StreetInsider MarketMinute. This paradox underscores a shift in investor sentiment: the AI sector, once a haven for speculative bets, is now demanding tangible profitability and sustainable growth.

The AI Sector's "Cooling Off" and Valuation Realism

The broader AI sector is experiencing a correction. Companies like C3.ai and UiPath, which once traded at sky-high multiples, are now under scrutiny. C3.ai, for instance, trades at a forward P/S of 6.7x, significantly lower than Palantir's 25x, despite reporting 26% year-over-year revenue growth, according to a Nasdaq analysis. UiPath, with a forward P/E of 4.63x, has even achieved GAAP profitability, yet its valuation remains modest compared to Palantir's.

This divergence highlights a critical issue: Palantir's valuation is not just high-it is disconnected from industry norms. While its revenue growth is impressive, the company's forward P/E of 277x and P/S of 25x far exceed those of peers, many of whom are already trading at discounts to their historical averages, a point the MarketMinute also emphasized. The market is increasingly skeptical of companies that rely on "growth at any cost" narratives, especially in a sector where long-term profitability remains elusive for most players.

Short-Seller Pressure and Sector-Wide Anxiety

Short-sellers have amplified the sector's cooling. Michael Burry, the investor behind the 2008 housing crisis short, reportedly placed a large bet against Palantir via 5 million put options, contributing to its post-earnings selloff, according to a TS2 report. This move, combined with a broader pullback in AI stocks, has created a self-fulfilling prophecy: as investors take profits, volatility increases, and the risk of a cascading correction grows.

The ripple effects are evident. Smaller AI defense stocks like BigBear.ai (BBAI) have also plummeted, with its stock dropping 9% in early November 2025 despite no company-specific news, a development the TS2 piece highlighted. This sector-wide anxiety suggests that Palantir's valuation is not an isolated case but a bellwether for the AI industry's broader challenges.

The Sustainability Question: Can Palantir Deliver?

For Palantir's valuation to hold, it must demonstrate that its growth is not a flash in the pan. The company's recent partnerships with Nvidia, Lumen Technologies, and OneMedNet indicate a strategic pivot beyond defense contracting into healthcare and telecom, according to TS2 coverage. However, these ventures are still unproven at scale.

Moreover, the U.S. government shutdown-a recurring risk-could disrupt Palantir's revenue streams. While its Q3 results showed resilience, the company's reliance on public-sector contracts remains a double-edged sword. If political headwinds persist, its growth trajectory could falter, forcing investors to reassess its multiples.

Conclusion: Hype or Realism?

Palantir's valuation is a high-stakes gamble. On one hand, its financial performance and strategic partnerships justify optimism. On the other, its multiples are unsustainable unless earnings growth accelerates dramatically. The AI sector's cooling and short-seller activity signal that the market is no longer willing to tolerate speculative bets without clear paths to profitability.

For now, Palantir remains a "Hold" for most investors. While its long-term potential is undeniable, the current valuation demands caution. As one analyst put it, "Palantir is a $1 trillion company in theory, but a $100 billion company in reality-until it proves otherwise."