Palantir lifts FY25 outlook after 39% revenue jump, but high valuation triggers stock selloff

Why Did Palantir Stock Drop Despite Strong Q1 FY25 Results?

Palantir Technologies Inc. (NYSE: PLTR) delivered one of its strongest quarters to date, reporting a 39% year-over-year increase in revenue for Q1 FY25, with total sales reaching $883.9 million. However, the stock dropped more than 12% on May 6, 2025, closing at $108.86, as investor concerns about the company’s sky-high valuation outpaced enthusiasm over its AI-led growth trajectory.

Despite lifting its full-year guidance and maintaining profitability for the sixth consecutive quarter, Palantir’s market value faced a sharp correction. With a forward price-to-earnings (P/E) ratio exceeding 148x—well above the S&P 500 average of 20x—investors are reassessing how much future growth is already priced in. This sentiment shift marks a broader theme across tech stocks where lofty multiples are drawing scrutiny, particularly amid evolving interest rate narratives and market rotation away from ultra-growth equities.

How Did U.S. Commercial and Government Segments Perform?

Palantir’s performance was propelled by accelerated momentum in the U.S. commercial segment, where revenue soared 71% year-over-year to $255 million. The company’s U.S. total revenue rose 55% to $628 million, while U.S. government revenue expanded 45% to $373 million. Commercial revenue globally stood at $396.9 million, up 33% year-over-year.

During the quarter, Palantir closed 139 contracts valued over $1 million, including 31 deals exceeding $10 million. The company’s U.S. commercial total contract value (TCV) reached a record $810 million, surging 183% year-on-year. Additionally, its remaining deal value (RDV) in the U.S. commercial segment increased 127% to $2.32 billion, showing solid revenue visibility.

These figures underscore Palantir’s growing appeal among U.S. enterprises increasingly turning to its Artificial Intelligence Platform (AIP) to drive data-integrated operations. According to CEO Alexander Karp, Palantir is now at the heart of a “tectonic shift” in software adoption.

What Were the Key Financial Highlights for Q1 FY25?

Palantir’s GAAP net income more than doubled to $214 million, delivering a net margin of 24%. Operating income stood at $176 million, while adjusted operating income reached $391 million, reflecting a 44% adjusted margin.

The company reported GAAP earnings per diluted share of $0.08 and adjusted EPS of $0.13. Gross profit was $710.9 million, with a GAAP gross margin of 80%. Adjusted free cash flow came in at $370 million, representing a 42% margin, while total cash and equivalents stood at $5.4 billion.

Most notably, Palantir achieved a Rule of 40 score of 83%, well above the benchmark typically used to evaluate operational efficiency in high-growth software firms. These metrics position Palantir among a select group of profitable AI-led enterprise software vendors.

What Is the Sentiment Among Institutional Investors?

Despite the recent stock drop, institutional sentiment remains cautiously optimistic. According to Fintel and MarketBeat data, Palantir has 2,935 institutional owners, who collectively hold 58.2% of the company’s outstanding shares. Major holders include The Vanguard Group, BlackRock, and State Street Corporation.

Institutional inflows over the last 12 months total $13.28 billion, while outflows amount to $7.75 billion—indicating net positive positioning. However, analysts note that valuation remains a central concern. In the absence of multiple compression or outsized earnings expansion, short-term upside could remain capped even amid strong fundamentals.

Investor feedback gathered post-earnings suggests a “hold” sentiment prevailing among large institutions, with most opting to reassess after Q2 results and updated AI demand metrics.

What Is Palantir’s Revised FY25 Guidance?

Palantir raised its full-year FY25 revenue guidance to between $3.89 billion and $3.902 billion, representing a 36% growth forecast. The company also increased its U.S. commercial revenue forecast to at least $1.178 billion—a projected annual growth of 68%.

For Q2 FY25, the company expects revenue between $934 million and $938 million and adjusted income from operations between $401 million and $405 million.

Palantir reaffirmed its target of achieving GAAP net income in every quarter of 2025, continuing a streak it began in FY2023. The company also guided for adjusted free cash flow of $1.6 billion to $1.8 billion, indicating healthy liquidity amid ongoing global AI platform investments.

What Is Driving Growth in Palantir’s AI Business?

Palantir’s differentiated offering in the enterprise AI space—where it combines large language models (LLMs) with operational data through its Artificial Intelligence Platform (AIP)—has become a key growth lever. Unlike consumer-facing generative AI applications, AIP is embedded into critical enterprise systems, delivering contextualized, real-time insights that align with strict compliance and security requirements.

In verticals such as aerospace, healthcare, automotive, and defense, AIP is facilitating intelligent automation and decision support. Palantir’s ability to act as the connective tissue between siloed data sources and generative AI layers gives it a strategic moat.

How Does Palantir Compare with Other Software Companies?

Palantir’s margins and cash flow performance place it ahead of many peers in the AI and SaaS categories. With adjusted operating margins over 40%, and GAAP profitability sustained, the company stands apart from AI platform peers still running heavy losses.

However, its 148x forward P/E remains a red flag for value-oriented investors. By comparison, Microsoft trades around 35x forward earnings, and Snowflake—another data platform company with AI aspirations—trades at around 65x.

The market correction appears to reflect a rebalancing of expectations rather than fundamental weakness. The ability to maintain pricing power and secure large multi-year deals will be key to justifying continued premium valuations.

What’s the Future Outlook for Palantir?

Looking ahead, analysts expect continued momentum in Palantir’s U.S. commercial business, supported by strong adoption of AIP and cross-sector digital transformation initiatives. Government revenues are also projected to rise steadily, driven by long-term defense and civilian modernization programs.

However, investors will monitor Q2 and Q3 closely for signs of sustained AI deal flow, execution across new verticals, and possible international expansion of AIP. Given Palantir’s robust balance sheet, further M&A activity or strategic investments—particularly in AI startups or edge computing—could also materialize in H2 FY25.

Overall, Palantir’s long-term thesis remains intact, but the stock’s performance in the coming quarters will hinge on its ability to convert AI hype into scaled earnings without further expanding its valuation premium.