Palantir's Growth: Two Red Flags in the Numbers

The numbers on the surface are staggering. Palantir's fourth-quarter revenue grew 70% year-over-year, accelerating from 63% in the prior quarter. Its U.S. commercial business, the engine of its explosive growth, surged 137% year-over-year. The company's financial health is equally robust, with a Rule of 40 score of 127%-a powerful signal that its growth is translating into profitable scale. In a world where high-growth stocks often sacrifice margins for market share, Palantir is doing both.

Yet the market's reaction tells a different story. After the earnings report, shares saw a sharp pop but quickly gave back all those gains, trading below where they were before the quarterly update. That post-earnings decline is the investor's skeptical whisper: the business is extraordinary, but the price demands near-perfect execution from here on out.

This is the central tension. The company is scaling at a pace that defies normal expectations, with its U.S. commercial revenue growth rate more than doubling from the year-ago period. The Rule of 40 score above 100 confirms this isn't just top-line noise; it's a high-quality growth story with operational leverage. But the valuation-already sky-high-leaves no room for a stumble. When a stock trades at a multiple that requires flawless, accelerating growth forever, even a slight deceleration in the pace of expansion can trigger a sharp reset. The business is firing on all cylinders, but the valuation has already priced in a miracle.

The Red Flags: Where the Growth Might Be Getting Thin

For a stock priced at 222 times earnings, the market is paying for a miracle. That means any sign of slowing momentum is a red flag, not a minor blip. The numbers from the fourth quarter show the growth engine is still powerful, but the fuel gauge is showing a slight dip.

The first warning sign is in customer count. Palantir's total number of customers grew 34% year-over-year last quarter, a meaningful slowdown from the 45% growth it saw in the third quarter. Even more telling is the sequential pace: growth in customer count decelerated from 7% in Q3 to 5% in Q4. This isn't about a single big deal; it's about the rate at which new businesses are signing up. For a company that has been scaling at a breakneck pace, this is a clear signal the expansion is getting thinner.

The second, more critical red flag is in the value of those new deals. Total contract value (TCV), which measures the potential lifetime value of new contracts, also showed a slowdown. Palantir closed about $4.3 billion in TCV last quarter, up 138% year-over-year. That's still an incredible rate, but it's down from 151% growth in the prior quarter. The deceleration in its core U.S. commercial business was even more dramatic, with TCV growth dropping to 67% year-over-year from a staggering 342% a year ago. In other words, the average size of new commercial deals is likely cooling off.

Put simply, the company is still adding customers and closing massive contracts, but the pace of both is slowing. For a valuation that demands flawless, accelerating growth, this change of pace is the kind of friction that can trigger a sharp reset. The stock's reaction tells the story: shares have plunged 29% since reaching a record in November, a move that prices in significant risk. The business is still firing on all cylinders, but the growth rate itself is showing its first signs of fatigue.

The Bull Case: Why Smart Money Still Bets on AI

The red flags are real, but they don't tell the whole story. For investors with a long view, the bull case for Palantir rests on a simple premise: it is a critical, high-quality component in the AI supply chain, and its financial trajectory justifies a premium. The recent selloff, in fact, may have made that premium more reasonable.

Analysts like Louie DiPalma at William Blair see the pullback as a buying opportunity. His upgrade to an outperform rating and a $200 price target imply significant upside. His view is grounded in the company's underlying momentum. According to his proprietary trackers, Palantir's growth has continued unabated. The company had an "astounding" September quarter and is expected to report a "very strong" December quarter. This momentum is driven by both government and enterprise adoption, with new workflows being added under the Trump administration and across corporate America. The narrative isn't about a single quarter's numbers; it's about a sustained, multi-year expansion.

The financial projections back up this long-term thesis. DiPalma expects Palantir's operating margin to increase to 65% from 50% over the next five years. That kind of margin expansion, combined with its explosive revenue growth, points to a massive leap in profitability. He also forecasts the company will generate free cash flow of at least $7 billion in 2030. For a stock priced for perfection, that kind of future cash generation is the moat that justifies the valuation. It's the promise of a company scaling from a high-growth startup into a cash-generating powerhouse.

This is where the recent selloff matters. Shares have plunged 29% since reaching a record in November, a sharp move that has brought the stock down from its lofty peak. While still expensive, DiPalma argues that valuation now looks more reasonable relative to recent venture rounds for companies tied to the AI ecosystem. In other words, the market is pricing in risk, but it may be pricing out the company's long-term potential. The bull case is that Palantir is a leader in a critical AI supply chain, and its financial projections provide a durable moat. The red flags are about the pace of growth; the bull case is that the destination is still worth the price.

What to Watch: The Catalysts and Guardrails

The next few weeks are a make-or-break period for Palantir's story. The immediate catalyst is the company's own earnings report, released on February 2nd. This is the first hard data point to test the credibility of its bold 2026 revenue growth guide of 61% year-over-year. The market will be looking for confirmation that the company can hit that target, especially after the recent selloff. Any hint of a slowdown in the core U.S. commercial segment-where revenue grew 137% last quarter-would be a direct challenge to that guide.

The key metrics to watch are the same ones that raised red flags: customer count growth and the health of the U.S. commercial pipeline. Investors need to see if the sequential deceleration in customer additions-down to 5% quarter-over-quarter-is a temporary blip or the start of a trend. More importantly, they need to see if the average deal size and total contract value (TCV) are holding firm. The U.S. commercial TCV growth, which dropped to 67% year-over-year last quarter, is a critical leading indicator. If that number continues to cool, it suggests the expansion is getting thinner, even if the total dollar value remains high.

The ultimate guardrail is the stock's reaction to any guidance or commentary that hints at a slowdown in growth velocity. The market has already priced in near-perfect execution. As analyst Louie DiPalma noted, the recent selloff "creates a buying opportunity" for those who believe in the long-term AI thesis, but he also expects the post-earnings move to be "volatile". For the thesis to hold, the company must not only meet its 61% guide but also provide confidence that it can maintain the high growth rates that justify its premium valuation. Any guidance that suggests the pace is decelerating further would likely trigger another sharp reset, as the stock has already shown it cannot tolerate even minor stumbles.

In short, the coming weeks will test whether the growth story is intact or fraying. The earnings report is the first real-world test. If customer count and commercial TCV growth hold up, the bull case has a fighting chance. If they show further signs of fatigue, the valuation's vulnerability will be laid bare.