Palantir's Profit Nearly Quadrupled Over the Past Year. Its Stock Fell 40% From Its High. Both Numbers Get Tested on Aug. 3.

Over the past 12 months, Palantir Technologies (NASDAQ: PLTR) earned $2.28 billion in net income on $5.2 billion of revenue, nearly quadruple what it earned over the prior-year period. Its stock, meanwhile, fell 40% from a high of $207.52 to about $124 as of this writing.

Both numbers are accurate, and they don't contradict each other. A stock isn't a business. It's a price attached to one. Palantir's business kept accelerating while investors marked down what they were willing to pay for each dollar of it.

On Monday, Aug. 3, after the market closes, the second-quarter report will test both sides of that trade at once.

Image source: Getty Images.

The business has held up its end

What the company has delivered is not in dispute. First-quarter revenue rose 85% year over year to $1.63 billion, and it also grew 16% from the fourth quarter, so the pace was still building sequentially. CEO Alex Karp called it the company's highest overall revenue growth rate as a public company.

The composition was arguably even better than the headline. U.S. commercial revenue grew 133% year over year to $595 million, making it the fastest-growing piece of the business as American companies adopt Palantir's artificial intelligence (AI) platforms. U.S. commercial customers also signed nearly $1.2 billion of new total contract value in the quarter, so the pipeline behind that growth keeps refilling. U.S. revenue overall grew 104% and now makes up 79% of the company's total.

And the growth has been unusually profitable. Net income for the quarter was $871 million, a 53% margin. Palantir's adjusted gross margin came in at 88%, and its non-GAAP (adjusted) operating margin reached 60%.

Management responded by raising its full-year outlook. Palantir now guides for 2026 revenue of about $7.65 billion, or 71% growth, and for U.S. commercial revenue to grow more than 120% to over $3.2 billion. For the second quarter, the company guided for revenue of about $1.8 billion, and it lifted its full-year targets for adjusted operating income (to about $4.4 billion) and adjusted free cash flow (to $4.2 billion to $4.4 billion).

Those guidance lines matter more than usual on Monday, because they are the yardsticks management itself laid down just three months ago.

Why have shares been hammered?

So why did a business this strong lose 40% of its market value from the top?

At $207.52, Palantir traded at more than 130 times the earnings analysts expected over the following 12 months. Even now, after the decline, the forward price-to-earnings ratio is about 80, several times the multiple of almost any other large software company. The sell-off didn't reprice Palantir's execution, which has been excellent. It repriced how much future execution was baked into the valuation.

Sure, an 80-times multiple against profits compounding at nearly 300% isn't outlandish. If profit growth stays anywhere near this pace, the multiple shrinks toward ordinary within a couple of years without the stock moving at all. However, if growth downshifts -- and hypergrowth tends to downshift eventually -- then 80 times forward earnings stops looking like a number the business can grow through and starts looking like one of the most expensive prices in large-cap software again.

So, I think when Palantir reports earnings, investors will be looking for evidence that its torrid pace of growth can persist not just this quarter, but for years. The question isn't about whether Palantir is a good company. It is. The report tests if the growth is still fast enough to keep winning the race against the stock's own sky-high valuation multiple.

The line I'll watch first is U.S. commercial revenue. It is the piece the raised guidance leans on hardest, the segment growing 133%, and one of the first places a slowdown could show up. Second is the full-year revenue guide. Given the company's history of raising its guidance often, I'll be looking for another raise.

I'm personally not buying ahead of the report. At this multiple, the stock still prices in years of extraordinary execution. I don't mind paying a high price for a business like this, just not this high.

Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.