Palantir Just Crushed Earnings. So Why Is the Stock Down?

Palantir Technologies (NASDAQ: PLTR) is proving to be one of the best growth stocks in the world. It just posted strong growth yet again in the first quarter as the U.S. government and commercial enterprises adopt its artificial intelligence (AI) analytics platform. Profit margins are exploding higher, making it one of the most efficient software operators in the world.

So why is the stock falling after this report? It comes back around to the second important facet of any stock trade: valuation. Here's why Palantir stock keeps falling, and whether investors should consider buying the dip on this AI giant.

Image source: Getty Images.

Strong first quarter results

With its reputation for best-in-class analytics services for large enterprises and the U.S. government, corporations are rushing to Palantir to deploy its tools to keep up in the age of AI. Last quarter, U.S. commercial revenue grew 133% year over year to $595 million, a figure that has continued to accelerate in recent quarters. Remaining deal value on commercial contracts grew 112% to $4.92 billion, which should keep revenue chugging higher in the years ahead.

This acceleration in commercial deal value led to consolidated revenue growing 85% year over year, the company's fastest year-over-year growth ever, even as revenue climbs to over $5 billion. Due to its knack for spending efficiency, Palantir's operating margin is already one of the highest in the world, at 46% last quarter.

If Palantir can maintain this 46% margin and keep growing revenue at a blistering rate, it will soon reach $10 billion in revenue and close to $5 billion in operating earnings. This is the same company that was losing money a few years ago, showing how revolutionary the AI boom has been to this business model.

A hard-to-overcome valuation hurdle

What is bringing Palantir's stock price down is not a lack of fundamental business growth. It simply comes down to its valuation. This is the only reason the stock has fallen 34% from all-time highs.

Entering 2026, Palantir had a price-to-sales ratio (P/S) of 100. This is an unprecedented valuation figure. What this means is that Palantir's market cap -- currently $326 billion, but higher to start the year -- was 100 times its trailing revenue. That is not a multiple of earnings, but a multiple of revenue.

The S&P 500 trades at a P/S ratio of just 3.6 and a price-to-earnings ratio (P/E) of 31. Both are close to all-time highs compared to historical averages. Palantir's revenue growth may be off the charts, but its absurd valuation entering 2026 was too much for the stock to handle, which is why it has fallen this year.

PLTR PS Ratio data by YCharts

Should you buy Palantir stock today?

After falling from highs, Palantir now trades at a P/S ratio of 67 and a P/E ratio of 153. A little cheaper than a year ago, but nowhere near the market averages.

Let's run through some numbers to see whether Palantir investors could generate positive returns by buying shares now. Revenue over the last 12 months was $5.22 billion. If you are very optimistic and expect these rapid revenue growth rates to continue, then Palantir may 5x its revenue to $25 billion in five years. A 50% profit margin would turn that revenue into $12.5 billion in earnings. Or, compared to the current market cap of $326 billion, a P/E ratio of 26.

That still puts the stock at a P/E ratio close to the S&P 500 average, even if you assume massive revenue growth from here. Despite the stock's drawdown, I find it hard to imagine a scenario in which investors in Palantir earn an adequate return owning Palantir shares.

Brett Schafer 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.