A deceleration in U.S. commercial-contract growth gives some Wall Street analysts pause despite Palantir's earnings beat

Palantir booked its first-ever quarter with more than $2 billion in revenue.

Better-than-expected results from Palantir Technologies weren't enough to lift the stock in Monday's after-hours action.

Shares of the software company were down 3%, which one market expert attributed to the high bar that artificial-intelligence companies face in the current trading climate.

Palantir (PLTR) "came into earnings priced to perfection, hence the pullback off the beat," Ryan Lee, the senior vice president of product and strategy at Direxion, said in a note to clients. "Elevated expectations seem to be the main factor holding back this recent highflyer."

While Palantir shares are off 16% from their October peak of $212.94, they've gained 45% this year and have outpaced the iShares Expanded Tech-Software ETF IGV, which is up 8%.

There were various positives in Palantir's results, including that the company recorded its first quarter with over $2 billion in revenue, nearly double the year-earlier total. Palantir also saw its U.S. commercial sales top U.S. government sales for the first time. That's an indication of how Palantir's AI software is catching on, particularly with businesses.

However, William Blair analyst Louie DiPalma wrote in a Monday note that investors may have been disappointed by the slower rate of growth from U.S. commercial total contract value. Palantir closed $1.46 billion of U.S. commercial deals, up 11% from a year prior, but that was lower than the 153% growth that Palantir recorded in the second quarter. It's also the lowest growth since 2023, DiPalma added.

The company didn't hold back on the earnings call. "I am invigorated unlike ever before by the ambition I am hearing from our customers and their demand for sovereign AI, a revolution we should remember is barely one quarter old," said Ryan Taylor, the company's chief revenue officer.

Sovereign AI is Palantir's term for AI tools that let customers evolve and scale while protecting the privacy of their proprietary data and code. The company said that this philosophy is leading clients to deploy AI more rapidly because they see the ability to retain the essence of their businesses while gaining frontier-level AI capabilities.

"Put it this way, we've gone from being the most attractive person in the physics department to being the captain of the football team," CEO Alex Karp said on the call.

Karp thinks Palantir is one of just a few businesses that is creating actual value through AI. Palantir's value creation is "so extreme that a business that was viewed as a nice-to-have part of our business as late as three years ago is now the dominant part of our business," he said, referring to U.S. commercial. He called the company's growth "bombastic."

Meanwhile, further down the financial statements, Lee was struck by Palantir's free cash flow, a measure of the company's ability to generate cash in excess of what it spends on operations and equipment purchases. This came in at $1.216 billion on an adjusted basis, representing a 53% margin when measured as a portion of total revenue. A year ago, Palantir's free cash flow was just $540 million.

"In a time where the market is punishing shrinking FCF, it was great to see FCF generation accelerating," Lee said in emailed comments.

-Christine Ji -Emily Bary