Palantir: DOGE and Tariffs's Double Whammy – Will the Cult of AI Lose Its Halo?

$Palantir Tech(PLTR.US) released its Q1 2025 earnings after the market close on May 5th, Eastern Time. Overall, the Q1 performance exceeded expectations, although it was not as stunning as the previous quarter, the high growth trend in the short to medium term remains intact, and the guidance for Q2 and the full year is better than institutional expectations.

However, under high valuations, market tolerance is also decreasing. Ignoring the impact of tariffs and DOGE before the earnings report, the market capitalization reached a new high, approaching $300 billion, implying a 75 times EV/Sales for 2025. Therefore, aside from the criticism of being "not stunning enough," the first year-on-year decline in international commercial market revenue, which represents medium to long-term growth potential, is likely the main reason for the poor market response after the earnings report.

Specific core information from the earnings report:

1. The impact of the government efficiency year has yet to be reflected: In Q1, U.S. government revenue grew by 45% year-on-year, slightly expanding compared to Q4, which somewhat alleviated concerns about government revenue growth before the earnings report. On the official government revenue and expenditure website, the scale of contracts awarded to Palantir in Q1 did indeed show a quarter-on-quarter decline, but based on past years, short-term seasonal fluctuations do not indicate much.

The deep adjustment of Palantir in the first two months was mainly due to the impact of government DOGE. In February, the Secretary of Defense dropped a bombshell: future defense spending will decrease by 8% annually. The market immediately raised concerns about revenue growth for Palantir, which has over 40% of its revenue from the U.S. government.

However, the Secretary of Defense had a half-sentence afterward: focusing on high ROI areas. The AI and data analysis fields, where Palantir operates, are among the high ROI technology sectors. Therefore, even if the overall budget needs to be cut, Dolphin Research believes that the budget allocated to Palantir may not have decreased.

Additionally, a Trump-style "reversal" has arrived, with the defense budget for FY 2026 expected to reach $1 trillion, implying a compound annual growth rate of 10%, which seems to contradict the Secretary of Defense's statement. But regardless of how the budget ultimately materializes, the shift in government attitude can reignite valuation confidence for Palantir.

2. Explosive demand for defense in the EU: In Q1, growth rebounded to a year-on-year increase of 46% despite a high base, matching that of the U.S. government, reflecting the increasing short-term demand from international governments.

Due to national security considerations, Dolphin Research had previously been cautious about optimistic expectations for revenue growth from international government business. However, with the EU's demand for investment in military modernization surging, Palantir's growth momentum in this area is beginning to show.

For example, both Germany and the UK intend to increase military spending, but local defense companies like BAE Systems, Airbus, and Leonardo are not very competitive (AI transformation is slow), and compared to traditional military companies like Raytheon, Palantir's position is "relatively neutral," making it a core technology supplier for EU countries.

3. Macroeconomic Pressure, International Corporate Demand Continues to Weaken: In the first quarter, international commercial revenue experienced a year-on-year decline of 5% for the first time, significantly below market expectations. Although this segment accounts for the lowest proportion among the four business areas, it is also the main business expected to have medium to long-term growth potential.

Unlike government budget considerations, corporate IT budgets are often heavily influenced by the macroeconomic environment. The European economy has been under pressure for a long time post-pandemic, and although "better-than-expected" tariffs have not yet been introduced in the first quarter, companies may have already begun to factor in some anticipated tariff impacts.

Palantir's applications in the corporate sector mainly focus on supply chains in manufacturing, such as automotive, as well as consumer service companies in finance and pharmaceuticals. European automotive and pharmaceutical companies, which have a high degree of multinational attributes, are significantly affected by tariffs, leading to a stronger motivation for companies to cut IT budgets.

In addition, Dolphin Research suspects that there may also be concerns from clients regarding data security related to the storage and analysis of corporate data on non-domestic software. Specific details can be found in the management's explanations during the conference call.

4. AI Investments Confirmed, Profit Margins Remain Stable: The decline in gross margin year-on-year in the first quarter may be due to more AI investments being recognized during the period. Research and development, as well as sales expenses, continued to grow by over 20% year-on-year, with a noticeable control on management expenses. The adjusted operating profit margin was 44.2%, down 0.8 percentage points from the previous quarter, but still significantly exceeded market expectations.

5. Future Growth Targets Raised Accordingly: The revenue guidance for the second quarter implies a growth rate of around 39%, maintaining strong growth compared to the first quarter despite a higher base. In the first quarter, the proportion of domestic revenue in the U.S. rose to 71%, ensuring that strong demand from the U.S. government and enterprises guarantees Palantir's high growth this year. Management has steadily raised the annual growth target to around 36%.

In terms of profitability, the operating profit margin for the year is expected to be similar to that of the first quarter, implying that more AI spending recognition will temporarily slow the pace of profit improvement. However, Palantir's adjusted operating profit margin is already close to 45%, which is not low among non-subscription, heavily customized software services, reflecting the current competitive advantage of Palantir's products translating into sustained bargaining power.

6. Leading Indicators Show Strong Short-Term Growth: Palantir primarily provides customized software services to clients (with some standardization trends in the AIP segment), making revenue highly predictable in the short term. The company's guidance range is also relatively narrow, implying a high degree of revenue certainty.

However, for this reason, if one wants to reflect Palantir's true business growth situation, the market pays more attention to indicators related to new contracts, such as TCV (Total Contract Value), RPO (Remaining Performance Obligations), number of clients (mainly commercial clients), and Billings (current billing volume).

(1) The first three (TCV, RPO, number of clients) involve the impact of different cooperation cycles on revenue fluctuations, thus being more helpful for medium to long-term growth outlook: In the first quarter, TCV continued to show a healthy trend of high growthThe growth of TCV in the U.S. commercial sector is accelerating, and the application penetration of AIP has smoothed out short-term seasonal revenue fluctuations, resulting in a quarter-on-quarter increase against the trend in the first quarter.

The confirmed irrevocable contract amount RPO also maintains "high growth under a high base." In terms of long-term and short-term contracts, the net increase in mid-to-long-term contracts has slightly expanded compared to the previous quarter.

In terms of customer numbers, Palantir saw a net increase of 51 customers in the first quarter, mainly from U.S. enterprise users, while international enterprise users only increased by 1. Therefore, under macroeconomic pressure, the reduction in spending by existing customers has brought downward pressure on revenue, and the combination of expansion obstacles and some existing customer losses may impact growth expectations from a mid-term perspective.

(2) Short-term market focus on Billings and NDR changes: Billings in the first quarter increased by 45% year-on-year, exceeding expectations. Overall contract liabilities (including customer deposits) increased net, with a net revenue retention rate of 124%, continuing to improve quarter-on-quarter, reflecting a short-term marginal net expansion trend.

7. Performance Indicators Overview

Dolphin Research Perspective

For Palantir, whose market value has risen to nearly $300 billion, the absolute valuation has certainly detached from the fundamentals, and even the calculator seems to have exploded, making it unattainable. However, fundamentals are not unimportant; the marginal performance in the short term will continuously challenge market tolerance, thus being a key factor determining the direction of valuation changes.

From a competitive perspective and market expectations, the first-quarter performance is not bad, with comprehensive financial indicators exceeding expectations. Operational indicators such as customer numbers and contract amount changes are also good, indicating that high short-term revenue growth is sustainable. Overall, Dolphin Research believes that the most core point of Palantir's fundamentals—product competitiveness—has not changed much.

So what exactly is the market dissatisfied with? Or rather, under high valuation, what points is the market being picky about?

Before the earnings report, the main concern of the market regarding Palantir, or the biggest attack point for short sellers, is the impact of the U.S. government's DOGE on Palantir's government contract signing/performance progress, which has put pressure on government revenue growth. The supporting evidence for this viewpoint is that the growth rate of contracts awarded to Palantir in the first quarter has significantly declined on the U.S. government's spending official website.

However, the pressure on market expectations mainly exists in the first half of the year. In the second half, as DOGE ends, the AI investments represented by Palantir are not the main expenditure category being cut by the government. According to the current investment policy of the Department of Defense, Palantir's AI belongs to the "high ROI" field, which is actually a direction of strong investment, so the delayed expenditures will be restored and released.

But the actual situation is that Q1 did not reflect the delivery pressure after the U.S. government set efficiency improvement targets; instead, under the explosive growth of technology and defense demands from European governments (but there are no domestic companies that can compete with Palantir, so there are no better choices) , international government revenue growth rebounded significantly.**

The place where performance flaws arise — is due to the uncertainty in the macro environment caused by tariff conflicts, which in turn affects the IT budgets of multinational companies. In Q1, international business revenue experienced a year-on-year decline for the first time, with a net increase of only one customer. This indicates that it is not just a hindrance to market expansion, but also that existing customers are not merely reducing their engagement temporarily, but are directly canceling their cooperation. Dolphin Research suspects that this may also involve customers' data security concerns regarding the storage and analysis of corporate data on non-domestic software.

The potential for scaling has been one of the few points repeatedly questioned about Palantir, especially after it became a company with a market value of $300 billion. In addition to continuing to dominate in the U.S. market, such as capturing market share from traditional data analysis software (like Tableau, Informatica, and potentially even Salesforce, which is relatively lagging in AI advancements), internationalization is an important direction. However, as of Q1, Palantir's revenue from the U.S. continues to increase, reaching 71%, moving further away from internationalization.

The international government market, due to concerns related to national security, has not given high expectations. We believe that the sudden increase in demand from European governments can provide some support for Palantir's short-term revenue growth, but this is merely a "last resort" for European governments. From a medium to long-term perspective, once domestic enterprises effectively catch up technologically, switching suppliers could happen overnight.

Commercial internationalization, which does not involve national security, has always been a key area of hope for long-term sustainable growth, especially with the bundled product capabilities of AIP + Foundry outperforming global peers. Therefore, the year-on-year decline in revenue in Q1 may be the most unsatisfactory aspect for the market.

However, Dolphin Research believes that this flaw is not fundamentally damaging and is unrelated to product competitiveness, but rather related to macro and other objective factors. In other words, Palantir's expansion pace has only been temporarily slowed, rather than being in a state of continuous defeat due to inability to compete. From the perspective of institutional research clients, Palantir's competitiveness in "product AI integration," "efficient deployment," and the benefits that enterprises ultimately gain from using the platform (cost optimization by replacing traditional manual labor and traditional IT operations) has received positive feedback. Therefore, even if the price is not low, enterprises are still willing to maintain their investment and expenditure on the Palantir AIP + Foundry platform in the short term.

This is also why Dolphin Research believes that the valuation will not be truly impacted by Q1 performance. But as mentioned earlier, although the product seems to have unlimited prospects, Palantir is still considered absolutely overvalued (the scaling issue makes it impossible to accurately estimate TAM and development timelines), thus it does not align with Dolphin Research's preferred investment opportunities. Moving forward, the focus on Palantir will be more on tracking fundamental research to understand the dynamics of AI frontier technology applications.

The following is a detailed analysis

1. Overall strength, with flaws in segmentsIn the first quarter, total revenue reached $884 million, a year-on-year increase of 39%, exceeding market expectations (approximately $863 million), with growth continuing to accelerate compared to the previous quarter.

Palantir primarily provides customized software services to clients, making revenue relatively predictable in the short term, and the company's guidance range is also quite narrow, implying a high degree of revenue certainty. However, consistently exceeding the upper limit of guidance over several quarters reflects strong demand from clients for AIP and Foundry.

I. Business Situation

(1) Government Revenue: No DOGE impact reflected in the U.S., explosive defense demand in the EU

Government revenue in Q1 grew by 45% year-on-year, with accelerated growth driven by both U.S. and international governments.

Concerns in the market about the declining growth rate of government contract awards due to DOGE impact did not materialize in Q1, as U.S. government revenue still saw a 45% accelerated growth. In Q1, three intelligence vehicles under Palantir's TiTAN contract signed last year have been delivered since the beginning of the year. These intelligence vehicles are planned for operational testing and evaluation between 2027 and 2028, aimed at collecting, integrating, and analyzing data from various sources such as satellites and aircraft to target and identify the positions of enemies and allies.

The growth of international government revenue is mainly driven by Europe. To emulate the U.S. in investing in military modernization technology, governments in Germany, the UK, France, Sweden, and others are significantly increasing defense spending. For example, Germany is amending its constitution to expand military spending, and the UK is reviewing a new defense budget to increase investments in software, AI technology, and other areas.

Despite concerns about national data security, local companies are struggling with slow AI transformation, such as BAE Systems, Airbus, and Leonardo, which cannot quickly develop leading technology systems similar to Palantir. The positive effects of Palantir on these defense departments are not only in enhancing data analysis and decision-making capabilities but also in reducing personnel requirements and lowering operational costs of traditional software platforms through automation.

(2) Commercial Market: Macroeconomic Drag, Internationalization Hindered

In Q1, commercial revenue grew by 33% year-on-year, remaining basically flat compared to the previous quarter, primarily due to poor performance in the international market. Unlike government budget considerations, corporate IT budgets are often significantly affected by the macroeconomic environmentIn the first quarter, the international corporate client base only increased by 1 person, indicating a significant slowdown in expansion. Dolphin Research speculates that, in addition to macroeconomic pressures leading to reduced spending by existing users, there may also be concerns regarding data security related to the storage and analysis of corporate data on non-domestic software, which could directly result in customer loss.

The European economy has been under pressure for a long time post-pandemic. Although "better-than-expected" tariffs have not yet been introduced in the first quarter, companies may already be anticipating some impact from tariffs. Specific details can be found in the management's explanations during the conference call.

II. Contract Situation: Short-term Growth is Worry-Free

For software companies, future growth potential is the core of valuation. However, the revenue confirmed each quarter is a relatively lagging indicator, so we recommend focusing on the acquisition of new contracts, primarily reflected in contract status (RPO, TCV), current billing flow, and the increase in the number of customers.

(1) Remaining Unfulfilled Contracts (RPO): Marginal Expansion of New Medium- to Long-term Contracts

In the first quarter, Palantir's remaining contract amount was $1.9 billion, an increase of $170 million quarter-on-quarter, consistent with the net increase from the previous quarter. Among them, the long-term contracts that saw weak growth last quarter have recovered somewhat in the first quarter, and seasonal fluctuations do not change the long-term trend.

(2) Current Billing Flow & Deferred Revenue: Growth is Warming Up

In the first quarter, the billing flow was $905 million, a year-on-year increase of 45%. The contracts billed during the period mainly reflect fluctuations in short-term demand (including parts of revenue already confirmed during the period). Although, based on historical situations, Dolphin Research believes that seasonal fluctuations from a product competitiveness perspective do not indicate many issues. However, due to the relatively high valuation, the market will pay more attention to changes in this short-term indicator.

The overall contract liabilities (including customer deposits) increased net quarter-on-quarter, with a net revenue retention rate of 124%, continuing to improve quarter-on-quarter, reflecting a trend of short-term marginal net expansion.

(3) Total Contract Value (TCV): Seasonal Fluctuations, Continuing Healthy Growth

In the first quarter, the newly recorded total contract value was $1.5 billion, a year-on-year increase of 66%. Although there are seasonal fluctuations, the overall healthy growth trend remains unchanged.

(4) Customer Growth: Driven Entirely by American Companies

From the most intuitive customer numbers, which are also a medium to long-term indicator, there was a net increase of 58 companies quarter-on-quarter in the first quarter, of which 51 were from commercial clients, and 50 were from the United States. The remaining net increase of 7 came from government agencies.

Combining <1-4>, Dolphin Research believes that, aside from the fact that the demand from international corporate clients is indeed affected, local American clients and international government clients are showing strong interest in Palantir. The growth dividend from Palantir's leading product capabilities still exists.

III. Profit Margin Maintained, AI Investment May Increase Costs

In the first quarter, Palantir achieved a GAAP operating profit of $176 million, possibly due to more AI investments being recognized during the period, leading to a year-on-year decline in gross margin. Research and development, as well as sales expenses, continued to maintain a year-on-year growth of over 20%, but still below the revenue growth rate. The significant expenditure control was mainly in management expenses. The abnormal SBC from the previous quarter returned to normal in the first quarter.

After adjustments, the operating profit margin was 44.2%, down 0.8 percentage points from the previous quarter, but still exceeding market expectations.

From the full-year guidance (Adj. OPM profit margin of 44%), it indicates that there will still be an increase in AI costs recognized in the second half of the year, which will delay Palantir's profit improvement pace. However, for non-subscription-based and heavily customized software services, Palantir's profit margin is not considered low. Especially at the current valuation, expanding TAM and revenue is key to supporting the valuation. If short-term profits can be exchanged for scale expansion, it is not a bad thing.

Palantir's cash flow is related to contract payments, so there will be seasonal fluctuations. Generally speaking, the fourth quarter may involve annual confirmation points, and short-term cash flow performance will be better.

Unlike companies that invest in large models, Palantir tends to focus on applications, so capital expenditures on AI investments have remained relatively stable, with most of the actual investments already recognized in advance. Although the current capital expenditure is not large in absolute terms, it has still more than doubled year-on-year, indirectly indicating that despite some degree of computational power contraction brought by DeepSeek, the accelerated penetration of leading applications will still drive an increase in demand for computational power

Dolphin Research "Palantir" Historical Study:

Financial Reports

February 4, 2025 Conference Call: Palantir (Minutes): Aiming to be the cornerstone company of this AI revolution

February 4, 2025 Financial Report Commentary: Palantir: Crushing the shorts, the unattainable "AI faith"

November 5, 2024 Conference Call: Capturing more allies, what makes Palantir's AI different? (3Q24 Conference Call)

November 5, 2024 Financial Report Commentary: Palantir: The AI faith ticket brings hope again

August 6, 2024 Conference Call: Palantir: Our success lies in building AI products that meet real needs (2Q24 Minutes)

August 6, 2024 Financial Report Commentary: Palantir: Upgrading guidance, proving the growth story of AI

May 7, 2024 Conference Call: Palantir: In the U.S., we have no direct competitors (1Q24 Conference Call)

May 7, 2024 Financial Report Commentary: [Palantir: Exceeding expectations but plummeting? The market is more selective under high valuations](https://longportapp.cn/zh-CN/topics/20932431?invite-code=)》

February 6, 2024 Conference Call: The core driver of growth is a business model that starts with training and continuous investment in product strength (Palantir 4Q23 Conference Call)

February 6, 2024 Earnings Report Commentary: AI has triggered a new growth cycle for Palantir

November 3, 2023 Earnings Report Commentary: Palantir: Growth rebounds against the trend, is AI the hero again?》

In-depth

October 13, 2023: Palantir: What drives its high valuation?》

September 26, 2023: Palantir: The "mysterious" military weapon activated by AI》

Risk Disclosure and Statement of this Article: Dolphin Research Disclaimer and General Disclosure