Palantir Just Reported Its Best Quarter Ever. It Wasn't Good Enough.

For a while now, the rap on Palantir (NASDAQ: PLTR) has been that it's a great business, but that its valuation is unsustainable.

The company, known for its data analytics software and AI products, just reported another blowout quarter after the bell Monday, but surprisingly, the stock pulled back on the news, dipping by 3.6% in after-hours trading. As of Wednesday's close, it was down by more than 9% from where it closed trading before the report.

The stock initially rose when the report came out, but slid during the earnings call, though it wasn't clear why, as nothing was said during that update that seemed to reflect poorly on the stock. In fact, it was filled with the usual bombast from CEO Alex Karp.

One thing that may have influenced the stock's behavior was a 13-F filing from Michael Burry's Scion Asset Management, which revealed that it owned put options on 5 million shares of Palantir stock. Burry is famous for being one of the investors who foresaw the mortgage crisis, and whose actions to profit from it were chronicled in the book and movie The Big Short.

Let's take a look at Palantir's latest quarter before attempting to forecast where the stock will go from here.

Image source: Palantir.

Palantir smashes expectations

There's no question about it: Palantir's Q3 numbers were eye-popping. Overall revenue jumped 63% to $1.18 billion, ahead of the consensus estimate of $1.09 billion and the company's own guidance of $1.085 billion. The top-line growth rate also accelerated significantly from 46% in the second quarter.

U.S. revenue jumped 77% to $883 million in the quarter, driven by 121% growth in the U.S. commercial sales and 52% growth in U.S. government revenue.

The company's pipeline of future contract value is also exploding. Total contract value closed in the quarter jumped 151% year over year to $2.76 billion.

On the bottom line, generally accepted accounting principles (GAAP) earnings per share (EPS) tripled from $0.06 to $0.18, and adjusted EPS came in at $0.21, ahead of the 0.17 consensus estimate.

Not surprisingly, management raised its guidance for the year. It now expects 2025 revenue of between $4.396 billion and $4.4 billion, including revenue of $1.327 billion to $1.331 billion in the fourth quarter, or 60.5% revenue growth. It also called for adjusted operating income of $695 million to $699 million, implying an adjusted operating margin of 52.4% at the midpoint.

Is Palantir's bull run over?

Palantir's numbers, especially its rapidly growing backlog, are remarkable, but the stock's valuation is already in the stratosphere and seems to price in a best-case scenario.

Based on its updated revenue guidance for the year, Palantir is trading at a forward price-to-sales ratio of 110. Even for a company as profitable as Palantir, that is still a sky-high valuation that would typically be unsustainable. Even if it can continue to justify that premium, it will still act as a ceiling on the stock, as its valuation can't keep expanding the way it has been.

The stock's lofty premium is likely why Burry, who famously bet on the housing bubble collapsing, is short Palantir through put options.

The U.S. government is still Palantir's biggest source of revenue, providing it with $486 million in sales in the third quarter, but management expects the U.S. commercial business, which generated $397 million in the third quarter, to keep gaining ground.

The company's market opportunity in the private sector is much larger, but serving corporate clients comes with a different set of risks. For instance, a recession would likely sharply curtail the spending of businesses, which would likely sap Palantir's growth.

A valuation bubble could also throw off growth in the sector. It wouldn't directly impact customer spending, but it could cause them to scrutinize their spending and delay their AI outlays.

Despite Palantir's performance, the stock remains at risk of a sharp drawdown, depending on what happens at the macroeconomic level. While the business continues to look strong, its valuation is testing investor limits. A tumble in the stock seems likely to happen at some point, even if the company continues to put up blowout numbers.

Jeremy Bowman 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.