Palantir logo is seen at the International Defence Industry Exhibition in Kielce, Poland, on September 2, 2025. (Photo by Jakub Porzycki/NurPhoto via Getty Images)
NurPhoto via Getty Images
Palantir Technologies stock (NASDAQ: PLTR) has experienced a minor sell-off, decreasing by approximately 16% over the past three weeks. Although Palantir is still more than double its value year-to-date, there are a few concerns regarding the stock, which has benefited from a surge in interest in generative AI and an influx of new government contracts following Donald Trump’s re-election as President of the United States. Here’s a brief overview of what’s happening with Palantir.
Earnings momentum has also been robust: Palantir recently posted a beat-and-raise quarter, with Q2 revenue increasing by 48% year-over-year to surpass $1 billion. The company has raised its full-year revenue forecast to between $4.14 billion and $4.15 billion, up from its previous estimate of $3.89 billion to $3.90 billion. Adjusted operating margins have risen to 48%, compared to 37% in the same quarter last year. However, this strength is exactly why the risks are also understated. When expectations are extremely high, the decline can be significant. See How Palantir stock falls to $80
Interest Rate Cuts and the Overheated AI Market
The Federal Reserve has indicated that interest rate cuts may be on the horizon in September. Although this should ideally benefit high-flying AI software stocks like Palantir, the situation hasn’t unfolded as expected, as numerous small-cap stocks, which appear relatively undervalued, have rallied amid the anticipation of rate cuts. The markets seem to be betting that a lower cost of capital and a potential increase in consumer spending resulting from the cuts could aid smaller companies. Nvidia stock has also decreased by nearly 7% in recent weeks.
In a related note, Sam Altman, the CEO of AI pioneer OpenAI, recently expressed that the current artificial intelligence market may indeed be in a bubble. He feels that investors are currently “overexcited about AI,” reminiscent of the dot-com bubble of the late 1990s. Although Altman still considers AI as a monumental technological advancement that will ultimately provide significant economic value and innovation, his remarks should give investors pause.
Risks Associated with Government Contracts and Scaling the Commercial Business
Palantir has demonstrated strong growth, especially within its U.S. government sector, which experienced a 53% year-over-year increase in revenue to $426 million in the past quarter. However, this growth comes with risks. Government contracts can be irregular and unpredictable, making future growth challenging to anticipate. Given the company’s heavy dependence on federal contracts, shifts in government priorities, budget reductions, or contract losses could significantly affect its revenue trajectory and exert downward pressure on the stock.
MORE FOR YOU
Palantir’s long-term growth relies on the commercial market, which the company serves through its Foundry platform. While the commercial segment has shown promise, it may face challenges ahead. The company’s contract sizes are typically large, and implementation is intricate and costly, suggesting that the product may not scale effectively with small and medium-sized enterprises. Expanding Foundry beyond large corporations may necessitate a different go-to-market strategy—one for which Palantir is not currently prepared. This could adversely affect growth in the long run.
High Valuation
Palantir Technologies’ Revenues have grown at an average annual rate of 24% over the past three years, significantly surpassing the S&P 500’s growth of 5.2%. Yet, even this impressive performance does not justify the stock’s current valuation. The stock is trading at roughly 90x FY’25 revenue and around 245x FY’25 earnings—multiples that provide little margin for error. Moreover, high-multiple growth stocks often struggle during economic slowdowns, as lower earnings growth can lead to sharp declines in valuation multiples. In downturns, markets tend to shift towards safer value stocks, and Palantir clearly does not fit that category.
If you’re not comfortable with the volatility of PLTR stock, the Trefis High Quality (HQ) Portfolio, consisting of 30 stocks, has a proven track record of comfortably outperforming the S&P 500 over the last four years. What’s the reason behind that? As a collective, HQ Portfolio stocks have delivered superior returns with lower risk compared to the benchmark index, providing less of a roller-coaster experience, as reflected in HQ Portfolio performance metrics.