The sharp gains Palantir Technologies' (PLTR 11.62%) shares saw following its earnings report earlier this week proved to be short-lived. In fact, those gains have now turned to losses, adding to an already bad start to the year for the stock. As of this writing, the stock is trading at a price below where it was before the quarterly update.
But should we be surprised?
Yes, the quarter was outstanding in terms of top- and bottom-line growth. Both revenue and profits soared, and the company's top-line growth rate saw a huge acceleration over its already impressive third-quarter growth rate. But there are several red flags -- particularly in the context of the growth stock's incredibly high valuation.
Here's a look at two concerning metrics from Palantir's fourth-quarter update.
Image source: Getty Images.
Slowing customer count growth
Yes, Palantir's 70% year-over-year revenue growth in the fourth quarter was impressive. Not only was it an acceleration from 63% growth in Q3, but it was accompanied by a surge in profits. The AI data and analytics platform company's net income rose from just $77 million in the year-ago period to about $612 million in Q4.
Playing key roles in the quarter's growth were a 137% year-over-year increase in its U.S. commercial revenue and a 66% boost to its U.S. government revenue.
But with a valuation of about 222 times earnings, this type of growth should be expected. Even more, the results should be scrutinized for any potential red flags, and I think I see two, with the first being a sharp slowdown in customer count growth.
Palantir said that its customer count rose 34% year over year during the quarter -- a meaningful slowdown from 45% growth in the prior quarter. Even more, growth decelerated on a sequential basis as well. Palantir's sequential growth in customer count in Q4 was 5% -- a slowdown from 7% growth in Q3.
To be fair, the average size of Palantir's new customers may be increasing.
NASDAQ: PLTR
Key Data Points
Decelerating total contract value growth
Perhaps more concerning since it can be measured in dollar value instead of customer count, was Palantir's deceleration in the total contract value (TCV) of the deals it closed, which Palantir defines as "the total potential lifetime value of contracts entered into with, or awarded by, our customers at the time of contract execution[...]."
In Q4, Palantir closed TCV of about $4.3 billion, up 138% year over year. For Q3, management said it closed about $2.8 billion in total contract value -- up 151% year over year.
And the slowdown in its closed U.S. commercial TCV was even more dramatic, coming in at 67% year over year in Q4 -- down from 342% growth in Q3.
This deceleration in these key metrics marks a change of pace for the company; Palantir's customer count and TCV growth rates both accelerated sequentially in Q3.
Of course, given that Palantir's TCV growth is still staggering, the company won't likely see a meaningful slowdown in its revenue growth rate anytime soon. In fact, the midpoint of management's revenue guidance range for Q1 implies 74% year-over-year growth -- a sequential acceleration. Further, the midpoint of the company's full-year guidance calls for top-line growth of about 61%. And given the company's habit of beating and raising its guidance, this likely means it could post even faster growth than this in 2026.
But if these decelerating trends in customer count and TCV persist, it could mean that a slowdown in the company's revenue growth is at least on the horizon.
It's worth emphasizing that calling this change of pace in these key metrics red flags isn't fair if you were just analyzing the business without any consideration of the stock; Palantir continues to be extraordinary as a business. But given the growth stock's extremely high valuation, these are red flags in my opinion.
