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Palantir Technologies: A Performance Update and Valuation Reality Check
- Elias Zeekeh, MBA, CPA, CMA
- Sep 26
- 6 min read
Despite exceptional growth and transformational potential, Palantir trades at historically extreme valuations that echo the cautionary tale of Shopify's multi-year sideways performance following its 2021 peak.
Executive Summary
Palantir Technologies has delivered one of the most remarkable stock performances in recent market history, gaining 971% from January 2024 to September 2025. However, with a current price-to-earnings ratio of approximately 592 and trading at 120 times revenue, the stock now faces significant valuation concerns that parallel the challenges faced by other high-growth companies like Shopify, which traded sideways for years after reaching extreme valuations in 2021.[1][2][3]
Outstanding Operational Performance
Revenue Growth Acceleration
Palantir's fundamental business performance has been nothing short of exceptional. The company achieved several critical milestones in 2025:
Q2 2025 marked a historic breakthrough, with revenue exceeding $1 billion for the first time, representing 48% year-over-year growth. This acceleration continued a trend of strengthening growth rates throughout 2024 and 2025.[4][5]
U.S. commercial revenue emerged as the primary growth driver, surging 93% year-over-year to $306 million in Q2 2025. This segment now accounts for over 40% of total revenue, marking a successful diversification from the company's historical government dependency.[5][6]
Government contracts remain robust, with U.S. government revenue growing 53% year-over-year to $426 million. Recent major wins include a $1 billion five-year contract with the UK Ministry of Defence, demonstrating the company's expanding international presence.[7][5]
Profitability and Cash Generation
The company has achieved remarkable profitability metrics. Adjusted operating margins reached 46% in Q2 2025, while adjusted free cash flow hit $569 million, representing a 57% margin. The company's Rule of 40 score reached an impressive 94%, far exceeding the benchmark for healthy software companies.[4][5]
Valuation Concerns: The Shopify Parallel
Historical Valuation Context
Palantir currently trades at valuation multiples that rank among the most extreme in market history. With a price-to-sales ratio exceeding 120, the stock surpasses virtually all historical precedents for large-cap software companies.[3]
Comparable analysis reveals the severity of overvaluation:
- Snowflake, despite strong growth, trades at significantly lower multiples[8]
- The company's forward P/E ratio of approximately 240-280 assumes near-perfect execution for years[9][10]
- Morningstar's fair value estimate of $115 suggests the stock is overvalued by more than 50% at current levels[11]
The Shopify Warning
Shopify provides a cautionary precedent for investors considering Palantir's current valuation. After reaching a peak of $176 in November 2021, Shopify experienced a dramatic decline to below $30 in 2022—a decline of over 80%. The stock required nearly three years to approach its previous highs, during which shareholders endured extended periods of sideways to negative performance.[12][13]
Key parallels between Shopify 2021 and Palantir 2025:
- Both reached extreme valuation multiples during peak market enthusiasm
- Strong fundamental growth was overshadowed by unsustainable valuations
- High retail investor participation amplified volatility
- Both companies had legitimate long-term growth prospects that were prematurely priced in
Risk Factors and Vulnerabilities
Valuation-Driven Vulnerability
Multiple compression risk is substantial. Research indicates that stocks trading above 120 times sales historically decline by 70% or more when valuations normalize. Even maintaining strong growth, Palantir faces significant downside if multiple compression occurs.[3]
Competitive and Market Risks
Government contract competition is intensifying. The U.S. Defense Department's decision to award AI contracts worth up to $200 million to OpenAI, Anthropic, Google, and xAI signals increased competition for budgets Palantir historically dominated.[14]
International expansion challenges persist. While U.S. revenue grows robustly, international commercial revenue declined 3% year-over-year, highlighting difficulties in global scaling.[5]
Technical and Sentiment Indicators
Recent volatility suggests institutional profit-taking. The stock has declined 6.5% from its August 2025 peak of $190, with trading ranges of 43.6% over the past 60 days indicating heightened volatility.[1]
Analyst sentiment remains cautious despite strong fundamentals. The average price target of $155 implies 13% downside from current levels, with multiple firms maintaining neutral ratings despite acknowledging the company's execution excellence.[3]
Market Dynamics and Institutional Behavior
Retail vs. Institutional Positioning
Retail ownership exceeds 40%, creating potential for amplified volatility during sentiment shifts. Historical precedent shows retail-heavy stocks experience more severe corrections during market stress.[11]
Institutional positioning suggests caution. Despite strong operational performance, major investment banks maintain neutral ratings, indicating professional skepticism about current valuations.[15]
Investment Implications
The Growth vs. Valuation Paradox
Palantir presents a classic investment paradox: exceptional business fundamentals paired with extreme valuation risk. The company's technology, market position, and execution are world-class, but these strengths may already be fully reflected in the stock price.
Scenario Analysis
Bear Case: Following historical precedents of similarly valued companies, a 60-80% decline toward $35-70 per share would not be unprecedented, potentially requiring 3-5 years to recover even with continued strong growth.
Base Case: More modest multiple compression could result in 30-50% declines, with recovery dependent on sustained growth acceleration and market sentiment improvement.
Bull Case: Continued execution excellence and AI adoption could support current valuations, though this requires near-perfect performance against increasingly challenging comparisons.
Strategic Recommendations
For Current Shareholders
Consider partial profit-taking given the extraordinary gains achieved and elevated risk-reward profile. The company's long-term prospects remain excellent, but current valuations offer limited margin of safety.
Long-dated covered call strategy as income generation: For shareholders unwilling to sell outright, writing January 2027 covered calls at a $200 strike price presents an attractive income opportunity. Based on Palantir's high implied volatility (typically 60-80%), these LEAPS contracts could generate approximately $41 per share in premium income.[16][17][18][19][20]
Covered call income potential analysis:
- 1,000 shares (10 contracts): $41,000 in immediate premium income
- Annualized premium yield: Approximately 17.7% from premiums alone
- Total return if called away: 12.6% gain plus premium (approximately 27.4% annualized)
- Downside protection: Premium provides 23.1% cushion against declines[17]
The $200 strike represents a 12.6% upside capture from current levels while generating substantial income. Given Palantir's extreme volatility, the high option premiums make this strategy particularly attractive for generating income while maintaining upside exposure to $200.[21][16]
Risk considerations for covered calls: Shareholders forfeit gains above $200 per share, but retain all appreciation up to the strike price plus premium income. With PLTR's historical volatility, assignment risk exists if the stock continues its momentum.[22][23]
For Prospective Investors
Wait for more attractive entry points. While Palantir represents a compelling long-term opportunity, current valuations require flawless execution that leaves little room for disappointment.
Consider cash-secured puts as an alternative entry strategy, selling puts at strike prices 15-20% below current levels to potentially acquire shares at a discount while collecting premium income.[23][24]
Monitor key indicators: Revenue growth sustainability, commercial segment expansion, government contract renewal rates, and competitive positioning in AI markets.
Income-Focused Strategy Implementation
For existing shareholders seeking to monetize volatility without selling shares, the covered call approach offers several advantages:
Monthly income potential: Even with 16-month LEAPS, the strategy generates approximately $2,560 per month per 1,000 shares in income equivalent, significantly higher than traditional dividend yields.[25][26]
Volatility monetization: Palantir's high implied volatility (often exceeding 65%) creates premium-rich options that benefit sellers, making it an ideal candidate for covered call strategies.[19][27]
Portfolio risk management: The premium income provides a buffer against downside moves while allowing participation in upside gains to the strike level, effectively reducing portfolio volatility.[28][21]
The strategy becomes particularly compelling given Palantir's tendency toward large price swings, as the high volatility translates directly into higher option premiums that benefit income-seeking shareholders willing to cap their upside at reasonable profit levels.
Conclusion
Palantir Technologies has delivered transformational growth and established itself as a dominant force in AI-powered data analytics. However, like Shopify in 2021, the stock's valuation has reached levels that discount years of perfect execution, creating significant downside risk despite the company's exceptional fundamentals.
The Shopify precedent serves as a reminder that even outstanding companies can experience extended periods of poor stock performance when valuations become disconnected from near-term reality.
Investors should approach Palantir with appreciation for its long-term potential while recognizing the substantial valuation risks that could lead to years of sideways or negative returns, even as the underlying business continues to thrive.
For current shareholders, implementing a covered call strategy on January 2027 LEAPS can provide meaningful income generation while maintaining substantial upside participation. The combination of Palantir's high implied volatility and the reasonable $200 strike price creates an attractive risk-adjusted income opportunity that helps monetize the stock's volatility while providing downside protection.
The key lesson: Great companies don't always make great investments at any price, and timing remains crucial even for the highest-quality growth stories. However, sophisticated options strategies can help investors navigate extreme valuations while generating income and managing risk.
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22. https://www.reddit.com/r/CoveredCalls/comments/1ijdsc0/i_sold_covered_call_and_the_strike_price_for/
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