The impressive valuation of this growing stock sets a high standard for what investors might anticipate from the company.
After Palantir Technologies‘s (PLTR 11.72%) earnings report this week, it was pretty clear that the stock’s price surge wouldn’t hold up for long. Indeed, those gains have flipped into losses, making a rough start to the year even worse. At the moment, the stock trades below its price before the quarterly update.
But should we really be shocked?
Admittedly, this quarter showcased remarkable growth in both revenues and profits. Sales jumped noticeably, with growth accelerating from the already strong rate seen in the third quarter. Yet, lurking in the background are some concerning signs, especially considering the extremely high valuations typical of growth stocks.
Let’s look at a couple of key metrics from Palantir’s Q4 update.
Deceleration in customer growth
It’s true that Palantir’s year-over-year revenue growth of 70% in the fourth quarter was impressive. Not only did it climb from the previous quarter’s 63%, profits also saw a notable rise. The AI data and analytics platform reported a net income of about $612 million in Q4, a dramatic increase from just $77 million a year prior.
A significant factor in the quarter’s growth was a whopping 137% increase in U.S. commercial revenue, along with a 66% rise in U.S. government revenue.
However, with a price-to-earnings ratio hovering around 222, such growth could be expected. Moreover, these results warrant a closer look for potential red flags. I think there are two key concerns. The first is a pronounced slowdown in customer growth.
Palantir reported a 34% year-over-year rise in customers for the quarter, a marked decline from the previous quarter’s 45% growth. Additionally, growth has also slowed when comparing quarters, with just 5% growth in the fourth quarter down from 7% in the third quarter.
That said, I should point out that the average size of Palantir’s new customers might be increasing.
Slowing growth in total contract value
Perhaps even more worrisome—since it can be quantified with dollar figures—is the slowdown in the total contract value (TCV) from Palantir’s closed deals. Palantir defines TCV as “the total potential lifetime value of a contract entered into with or awarded by a customer at the time of contract execution.”
In the fourth quarter, Palantir generated roughly $4.3 billion in TCV, representing a 138% year-over-year increase. However, the total contract volume reported in the third quarter was about $2.8 billion, indicating a 151% increase compared to the same period last year.
The slowdown was even more pronounced for the company’s U.S. commercial TCVs, which saw only 67% year-over-year growth in the fourth quarter, a sharp drop from 342% in the third quarter.
This deceleration in key metrics signals a notable shift for the company. Customer counts and TCV growth had been accelerating as of the third quarter.
Nonetheless, given that Palantir’s TCV growth rate remains quite strong, it seems unlikely that the company will see a pronounced slowdown in revenue growth anytime soon. The management’s earnings guidance for the first quarter suggests a year-over-year growth of 74%, implying acceleration. Additionally, the midpoint of the full-year sales outlook anticipates around 61% growth. Considering the company’s history of exceeding earnings estimates, it’s possible that growth could be even faster in 2026.
However, if the trends in customer numbers and TCV continue to decelerate, it might signal a potential slowdown in revenue growth.
It’s important to note that this deceleration shouldn’t automatically be deemed a red flag if you’re analyzing the business without factoring in the stock price. Palantir remains an impressive company, but with growth stocks commanding very high valuations, I believe these are cautionary indicators.
