Why Palantir Stock Plummeted Today

Palantir Technologies (NASDAQ: PLTR), one of the most richly valued defense stocks on the planet with a $460 billion market cap, got a little bit cheaper on Tuesday, falling 7% through 11:15 a.m. ET.

Crazily, this happened after Palantir beat on earnings.

Heading into the report, analysts forecast Palantir would earn $0.17 per share (adjusted for one-time items) on just under $1.1 billion in quarterly sales. In fact, Palantir earned $0.21 (also non-GAAP) and its sales were nearly $1.2 billion.

Image source: Palantir.

Palantir Q3 earnings

Palantir boasted total revenue growth of 63%, powered by 77% U.S. growth. Growth in U.S. government contracts revenue was slower than average at 52%, while commercial growth boomed an incredible 121%.

Earnings as calculated according to generally accepted accounting principles (GAAP) was only $0.18 per share, below the non-GAAP number -- but still better than expected. And Palantir generated $540 million in quarterly free cash flow, up 46% year over year (but slower growth than the sales gain might imply).

Is Palantir stock a buy?

Long story short, it was a bit of a mixed quarter for Palantir. Yes, the defense tech wunderkind beat expectations -- but profits and free cash flow don't appear to be keeping up with sales growth, suggesting the company is experiencing diminishing returns.

The more pressing concern remains the stock's insanely rich valuation. Palantir says it expects to generate about $2 billion in positive free cash flow this year, and ordinarily, that would be a great number -- especially on just $4.4 billion in full-year sales!

Problem is, on a $460 billion market cap, $2 billion in FCF works out to a 229 price-to-free cash flow ratio, and that's simply too high a price to pay for any stock. Even Palantir stock.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.