Palantir's Valuation Crossroads: Growth vs. Gravity

In the high-stakes world of AI-driven enterprise software, Palantir Technologies (PLTR) stands at a critical juncture. Its Q1 2025 results—39% revenue growth to $884 million, a 42% free cash flow margin—highlight explosive momentum. Yet its stock price fell 8% post-earnings, underscoring investor skepticism about its sky-high valuation multiples: a P/S of 92 and P/E of 593, dwarfing peers like Snowflake (SNOW) and CrowdStrike (CRWD). Is this a buying opportunity at $113/share, or a bubble waiting to pop? Let's dissect the numbers.

Growth: A Rocket Engine or a House of Cards?

Palantir's revenue acceleration is undeniable. Its U.S. commercial segment surged 71% to $255 million in Q1, crossing a $1 billion annualized run rate for the first time. Government revenue rose 45%, while its AI Platform (AIP) is now core to contracts with NATO, AIG, and Citibank. CEO Alex Karp calls AIP a “transformative” tool for enterprise autonomy—enabling clients to analyze petabytes of data in real time.

However, risks lurk. International commercial revenue fell 5% YoY, reflecting European market challenges. Worse, its Rule of 40 score (a tech industry metric adding profit margin and revenue growth) improved to 83, but its profit margins remain volatile. While the adjusted operating margin hit 44%, this excludes stock-based compensation—a red flag for investors wary of accounting tricks.

Valuation: Defensible or Deranged?

Palantir's P/S of 92 is nearly triple its peers' average. Even if its 2025 revenue hits $3.9 billion (as guided), its P/S would still be 23—still high for a software company with 30%+ growth. The P/E of 593 is even more concerning; it implies investors are betting on decades of growth to justify today's price.

The market's skepticism is justified. Insiders have sold $2.6 billion of shares over two years, with CTO Shyam Sankar offloading $681 million alone. In May 2025, Sankar sold $6.95 billion of shares—likely a data error, but the scale underscores insider disquiet. Even as JPMorgan boosted holdings by 46%, Vanguard reduced its stake by $2 billion, signaling institutional divergence.

Risks: Geopolitical, Competitive, and Human

1. Geopolitical Dependence: 60% of revenue comes from U.S. government contracts. A shift in defense budgets or trade policies could destabilize growth.
2. AI Arms Race: Competitors like Amazon Web Services (AWS) and Microsoft (MSFT) are integrating AI into their cloud platforms, threatening Palantir's niche.
3. Valuation Squeeze: If revenue growth slows to 20% from 40%, the P/S would balloon further—making it a prime target for short-sellers.

The Bull Case: AI's Unstoppable Momentum

Bulls argue that AIP's value proposition is unique. Its ability to unify disparate data sources (e.g., satellite imagery, financial transactions) gives it an edge in defense, finance, and healthcare. AIP's 2025 revenue could hit $1 billion, driving margin expansion. If Palantir's Rule of 40 climbs to 90+, its valuation could stabilize—or even rise.

Investment Decision: Hold for Now

At $113/share, Palantir trades at 23x 2025 revenue forecasts—a premium even for a high-growth firm. While its AI moat is real, the risks of insider selling, valuation compression, and AI competition are too significant to justify a buy.

Recommendation: Hold. Wait for two catalysts: 1. Evidence that AIP's revenue is scaling independently of government contracts. 2. A P/S contraction to 30–40x, aligning with peers. Until then, the downside risk of a valuation reckoning outweighs the upside potential of “another beat.”

Investors should monitor Q3 results for AIP adoption rates and international revenue recovery. If Palantir can sustain 35%+ growth while lowering its P/S, it could justify its price. But for now, gravity is tugging harder than growth.