Palantir's Business Is Booming. So Why Has the Stock Dropped by More Than a Third?

When a stock by close to 40%, investors usually assume something has gone wrong with the company. Perhaps sales are slowing. Maybe customers are leaving. Or perhaps the company's competitive advantage is fading. That's a reasonable assumption.

In Palantir Technologies's (NASDAQ: PLTR) case, however, it's largely the wrong one.

Despite the sharp decline in its share price since its late-2025 peak, Palantir's business has arguably never been stronger. Revenue continues to grow rapidly, demand for its AI software remains robust, and the company continues to win large commercial customers.

So what happened to trigger this tumble? The answer has less to do with Palantir's business -- and almost everything to do with how Wall Street values great companies.

Image source: Getty Images.

The business keeps getting stronger

If you looked only at Palantir's operating results, you'd probably struggle to explain why the stock has sold off from its November peak. The company has been delivering some of the strongest results in its history.

In the first quarter of 2026, revenue jumped 85% year over year to $1.6 billion, and management raised its full-year guidance as U.S. demand continued to accelerate.

Even more encouraging was the commercial business.

For years, skeptics argued Palantir was little more than a government contractor. That argument is becoming increasingly difficult to defend. Its U.S. commercial revenue surged more than 130% year over year, highlighting just how quickly enterprises are adopting the company's software.

Palantir also remains highly profitable, with a 46% operating-income margin and a 57% free-cash-flow margin even as it continues to invest heavily in growth.

By almost every operating metric, the business is stronger today than it was when the stock was making new highs in 2025.

The market isn't questioning the state of the business

Here's where many investors get caught out. A falling stock price doesn't always mean a weakening company.

Sometimes the opposite happens. The business keeps improving while the stock falls. That's because investors have moved from asking, "Is this a great business?" to asking a much harder question: "Is this business worth this price?"

That's exactly what appears to have happened with Palantir.

During the early phases of the AI boom, investors were willing to pay extraordinary premiums for the companies they believed would dominate the next generation of software. Eventually, expectations became so high that even outstanding business results were insufficient to justify those stocks' valuations.

We've seen this movie before.

Companies like Microsoft and Amazon have experienced periods when their businesses continued to improve while their stocks corrected sharply, as investors became less willing to pay extreme multiples to own them.

Why valuation matters when investing in a stock

Imagine buying a business that's expected to earn $1 next year. If you're willing to pay $100 for it today, you're basing that price on the assumption of years of exceptional growth.

Now imagine the company performs exactly as you expected. Revenue grows. Profits improve. Customers keep coming. But investors later decide they're only willing to pay $60 instead of $100. Nothing has changed inside the business. Yet the stock still falls 40%.

That's essentially what happened to Palantir. The company continued executing. The market simply became less willing to pay an extraordinary premium for the hope of future growth. For perspective, Palantir -- as of Thursday down by 37% from its peak -- still trades at a price-to-earnings (P/E) ratio of 146.

For long-term investors, that's an important lesson. A declining stock doesn't always signal a deteriorating business. Sometimes it simply reflects a reset in expectations.

What does it mean for investors?

Palantir remains one of the most compelling enterprise AI companies in the market today. Its commercial business is expanding rapidly, its products are gaining traction across industries, and management continues to execute at a high level.

But investing has never been just about finding great companies. It's also about understanding what expectations are already built into the stock price.

On one end, an average business can deliver outstanding returns for shareholders if expectations for it were previously low. Likewise, after expectations become unrealistic, even an exceptional business can disappoint investors if the market loses some of its undue optimism.

Palantir's recent sell-off is a timely reminder that business performance and stock performance don't always move together.

Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Microsoft, and Palantir Technologies. The Motley Fool has a disclosure policy.