Hook / Thesis
Right now the market fixates on an obvious number - Palantir's headline multiple - and treats it like the whole story. That misses a simpler, actionable signal: the business is producing cash and widening margins quarter after quarter. When an AI-facing software company that serves both government and commercial customers starts turning that growth into durable operating profit and cash, the risk profile changes. You don't have to believe in a perfect growth outcome to trade the improving economics.
I'm recommending a tactical, size-controlled long on a disciplined pullback. The trade is not a bet that Palantir will double next year; it's a way to own a high-quality cash-generating AI/analytics platform at a defined risk where margin expansion and a steady flow of enterprise/government catalysts can re-rate sentiment.
What Palantir does and why the market should care
Palantir builds analytical software — Foundry for commercial clients and Gotham for government — that centralizes data, automates workflows and produces operational insights. The company deliberately focuses on Western-allied governments and enterprises. That positioning matters: it reduces some geopolitical execution risk and keeps Palantir in the crosshairs for large-scale public-sector AI projects and multi-year enterprise digital transformations.
Why investors should care now: Palantir is doing three things you can measure: growing revenue, converting more of that revenue into operating profit, and producing meaningful operating cash flow. Those are the building blocks for a durable business value proposition even if consensus long-term top-line forecasts end up being aggressive.
Hard numbers that support the signal
- Revenue acceleration: Q3 2025 revenue was $1,181,092,000. That is up from Q3 2024's $725,516,000 - a year-over-year increase of roughly 63% for the quarter.
- Margin expansion: operating income in the last three quarters of fiscal 2025 shows a clear trajectory: Q1 2025 operating income was $176,048,000 (operating margin ~20% on $883.9M revenue), Q2 2025 operating income was $269,317,000 (~26.8% margin on $1,003.7M) and Q3 2025 operating income hit $393,256,000 (~33.3% margin on $1,181.1M). That cadence of margin expansion is rare among high-growth AI names.
- Profitability and cash flow: Q3 2025 net income was $476,748,000 and diluted EPS was about $0.18. More importantly, net cash flow from operating activities for the quarter was $507,664,000 and net cash flow for the period was positive $693,592,000. A growth company generating half-a-billion in operating cash in a quarter materially de-risks balance-sheet concerns.
- Balance-sheet strength: as of Q3 2025 total assets were $8.11396B with current assets of $7.586156B, liabilities of $1.425691B and equity of roughly $6.688269B. Current assets greatly exceed current liabilities — a solid short-term liquidity picture.
Put another way: revenue is growing strongly, operating margin is expanding quarter to quarter, and the company is turning that into cash. For investors who focus on earnings quality and cash conversion, that is a meaningful signal even if headline valuation ratios look rich.
Valuation framing - the uncomfortable math
Snapshot price: approximately $166.33 at the latest tick. Using the latest diluted average shares reported (Q3 2025 diluted average shares 2,571,057,000) gives an indicative market-cap of roughly $428B (this is an approximate calculation using the quarter's diluted average shares; outstanding share count and timing differences mean this is a directional number, not an official market-cap reported elsewhere).
If you annualize recent results conservatively (sum Q1-Q3 2025 revenue = $3.069B, annualized by multiplying by 4/3 = ~$4.09B), the simple price-to-sales implied by the indicative market-cap is > 100x. That is a headline that scares investors - and rightly so. The stock is priced for a near-perfect, multi-year scaling outcome.
That said, valuation arithmetic works two ways: if Palantir sustains the current revenue growth and keeps margins trending upward, the multiple could be justified over multi-year horizons. The trade I'm outlining is not to argue the current multiple is defensible today; it is to trade the observable improvement in cash flow and margins with a tight downside boundary.
Catalysts to watch (2-5)
- Commercial and enterprise signings - recent news shows expanded deals (e.g., HD Hyundai expanding group-wide deal reported 01/20/2026). Bigger, cross-segment deals lift visibility and ARR mechanics.
- Large sovereign and public-sector AI projects - the UK sovereign AI project that tapped Palantir (reported 01/21/2026) could lead to multi-year implementation work and follow-on contracts across EMEA.
- Earnings and guidance - management commentary on margin drivers, contract conversion rates and ARR lift will be key (analysts and market are watching one specific metric ahead of earnings).
- Margin and cash conversion - continued sequential margin expansion and sustained operating cash flow are the clearest path to a multiple re-rating.
TRADE IDEA (actionable)
Trade stance: Tactical long on pullback with strict position sizing.
Entry: 155 - 165 (buy the dip zone; current print ~166.33)
Initial stop: 140 (clear technical and risk boundary; ~ -15% from 166)
Target 1: 205 (near prior range highs and a reasonable near-term upside of ~25%)
Target 2: 250 (stretch target if margins and guidance beat; longer swing)
Position sizing: 2-4% of portfolio at entry; scale up only if catalysts confirm
Time horizon: swing (4-12 weeks) to position (3-9 months) depending on catalyst flow
Risk level: high (price sensitive to sentiment and macro)
Rationale: the entry range buys the margin-improvement signal while keeping a clearly defined stop below major support. Targets are sized to capture a sentiment-driven re-rate (Target 1) and a stronger fundamental/earnings re-rating (Target 2).
Risks and counterarguments
- Valuation compression: The stock reflects an extremely aggressive expected outcome. If growth decelerates or guidance disappoints, the share price can re-rate sharply. With an implied multiple well above typical software peers on simple arithmetic, downside is significant if sentiment shifts.
- Concentration and contract risk: While Palantir serves many clients, large government deals can be binary — contract delays, procurement changes or political pushback can remove a sizable chunk of near-term revenue expansion.
- Competition and pricing pressure: Enterprise AI and analytics is crowded. A competitor could commoditize part of the Foundry/Gotham value proposition or pressure pricing on renewals, slowing margin progression.
- Execution risk on scaling: Fast margin expansion needs to be repeatable. If the company trades short-term deals or one-off professional services that are not sticky, margins could snap back when that work lags.
- Macro & liquidity events: Market selloffs that punish high-multiple tech names will likely hammer the stock regardless of company-level improvements.
Counterargument I take seriously - the bull case: investors who argue the current multiple is justified point to the AI adoption compounding effect. If Palantir becomes a foundational data and model infrastructure layer for multiple large enterprises and governments, revenue could be multiples of current levels and the current valuation would look reasonable ex-post. That is a plausible path and is the primary reason the multiple remains high.
What would change my mind:
- Negative: If sequential revenue growth stalls three quarters in a row (Q-over-Q deceleration) or if operating margin reverses materially, I would exit the trade and re-assess.
- Positive: A sustained quarter where revenue growth stays >40% YoY while operating margin remains above 30% and operating cash flow stays positive and grows quarter-over-quarter would make me upgrade conviction and could justify a larger position even at a higher price.
Conclusion - clear stance
Palantir is priced for perfection, but you can trade the improving fundamentals without needing perfection. The critical signal the market is overlooking is not growth alone - it is growth that converts into operating profit and cash. That conversion materially changes downside risk versus a growth-only story.
For disciplined traders: use the entry zone, respect the stop, and size accordingly. The asymmetry is that you buy observable economics (margins and cash flow) at a defined downside while keeping upside exposure to continued enterprise and sovereign AI adoption. For longer-term investors, the company must demonstrate sustainable ARR-like revenue growth and repeatable margin expansion before the current headline multiple becomes comfortable.
Disclosure: This is a trade idea, not investment advice. Position size based on your risk tolerance and account size. Prices and figures cited are based on the latest reported quarter and market snapshot; share counts and market prices change. I may initiate a personal position in accordance with the parameters above.