Until recently, the capital markets have exhibited abnormal levels of strength over the last few years. Perhaps the biggest influence fueling stocks during this period is the bullish narrative surrounding artificial intelligence (AI).
Since May 5, 2022, the Invesco QQQ ETF -- which tracks the Nasdaq-100 -- has generated a total return of 58% as of this writing (May 6). This handily outperforms the 43% total return seen in the S&P 500 index. While these results might suggest that technology stocks in general have been strong performers, there are some notable outliers that have contributed to the AI trade.
Enter data mining darling Palantir Technologies(NASDAQ: PLTR). Over the last three years, Palantir stock has surged by 953% -- emerging as one of the top performers across the S&P 500 and Nasdaq-100 indexes.
Palantir's main tailwind over the last couple of years has been the successful launch and widespread adoption of its Artificial Intelligence Platform (AIP) software suite. AIP has brought in a new era of growth for Palantir -- underscored by accelerating revenue, widening operating margins, and consistent positive net income and free cash flow.
Just this week, Palantir delivered one of its most impressive earnings reports in the company's history. And yet, the stock plummeted immediately afterwards. Let's explore how Palantir performed during the first quarter of 2025, and assess why investors are dumping the stock despite such a monster growth narrative around the company's future.
How did Palantir perform relative to its guidance?
Back in February, Palantir provided investors with guidance around the first quarter and full year 2025. The table below illustrates management's prior guidance relative to how Palantir actually performed.
Category
Q1 2025 (Per February Guidance)
Q1 2025 (Actual Result)
Full Year 2025 (Per February Guidance)
Full Year 2025 (Updated Guidance)
Revenue
$858 million - $862 million
$884 million
$3.741 billion - $3.757 billion
$3.890 billion - $3.902 billion
Adjusted Income from operations
$354 million - $358 million
$391 million
$1.551 billion - $1.567 billion
$1.711 billion - $1.723 billion
U.S. commercial revenue
No guidance
$255 million
$1.079 billion
$1.178 billion
Adjusted free cash flow
No guidance
$370 million
$1.5 billion - $1.7 billion
$1.6 billion -$1.8 billion
Data Source: Palantir Investor Relations
To put it bluntly, Palantir absolutely crushed its Q1 campaign. Both revenue and adjusted operating income came in well ahead of estimates. And to make things even better, management significantly raised guidance for the full year across each of its major reporting categories.
Image source: Getty Images.
What happened to Palantir stock after Q1 earnings?
The chart below illustrates Palantir's stock price movements throughout 2025. I've annotated the chart with the company's earnings reports, which are called out by the purple circles with the letter "E" in the middle.
One interesting thing is that Palantir stock started to experience notable momentum throughout April, prior to Q1 earnings. As is often the case with momentum stocks, shares of Palantir cratered immediately following the Q1 report. While this may seem counterintuitive given the company's stellar operating results and encouraging outlook, there is an obvious element at play here with Palantir, and I think investors are finally beginning to realize it. Let's dig in a little deeper and explore what is likely driving the sell-off in Palantir right now.
Why did Palantir stock drop despite its monster earnings beat?
Even though Palantir is profitable, the company's net income and free cash flow are still relatively small. For this reason, valuing Palantir through earnings or cash-flow-based ratios isn't entirely helpful. Rather, I prefer looking at Palantir on a price-to-sales (P/S) multiple.
In the chart above, I've benchmarked Palantir against a peer set of other leading enterprise software businesses on a P/S basis. The extreme valuation expansion seen in Palantir stock has brought the company's P/S multiple to 92 -- more than three times the next closest comparable stock in the cohort.
While Palantir's performance has been quite impressive over the last couple of years, the simple fact is that it is hard to justify a market value of more than $250 billion for a company that's generated roughly $3 billion in sales over the last 12 months.
I'm not saying Palantir stock is not a buy, per se. But what I am trying to make clear here is that the price you pay for a stock does matter -- and right now, Palantir trades for an obvious premium relative to its peers in the software realm.
I think Palantir is in an interesting spot now, as a monster earnings beat and robust forecast weren't enough to entice investors to buy the stock. Rather, the opposite happened in that many investors likely cashed out and took profits off the table.
I still see Palantir as an AI winner in the long run. But right now, investors should be careful around momentum fueling the stock for fleeting periods and the precipitous sell-offs that follow.
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Adam Spatacco has positions in Palantir Technologies. The Motley Fool has positions in and recommends Cloudflare, CrowdStrike, Datadog, MongoDB, Palantir Technologies, ServiceNow, and Snowflake. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.
