Key Points
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Palantir’s top-line growth rate has been accelerating in recent quarters.
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Software stocks have taken a beating recently amid a broader market sell-off.
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At today’s valuation, investors are pricing in near-perfect execution.
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Shares of Palantir Technologies (NASDAQ: PLTR) fell 7.2% on Thursday, as software stocks were punished following ServiceNow‘s quarterly report, which sent its stock down about 18% and injected fear into the markets. Even though ServiceNow still posted 22% subscription revenue growth and raised its full-year outlook, its shares slid.
The sell-off also came a day after Palantir announced a $300 million software purchase agreement with the U.S. Department of Agriculture.
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In other words, the market seems increasingly unwilling to give software stocks the benefit of the doubt right now. And that makes Palantir’s setup worth revisiting.
Is Thursday’s fear-driven selling an opportunity for investors watching Palantir stock, or is it the opportunity they’ve been waiting for?
Image source: The Motley Fool.
What investors love about Palantir
Highlighting Palantir’s underlying momentum, the artificial intelligence (AI) data and analytics platform specialist’s fourth-quarter revenue rose 70% year over year to $1.41 billion. Driving the quarter, U.S. commercial revenue surged 137% to $507 million.
In addition, the company said its non-GAAP (adjusted) operating income reached $798 million, translating into an impressive 57% margin.
For the full year of 2025, Palantir’s revenue climbed 56% to $4.48 billion. And the company ended the year with $7.2 billion in cash and short-term investments and no debt on its balance sheet.
Further, Palantir’s year-over-year top-line growth rates have been accelerating. In fact, the company’s year-over-year revenue growth accelerated each quarter in 2025, starting with 39% in Q1 and ending with 70% in Q4.
In addition, growth rates like these are rare for any software company — let alone one already generating more than $4 billion in annual sales.
And then there’s management’s impressive outlook. In February, Palantir guided for first-quarter 2026 revenue of $1.532 billion to $1.536 billion. The midpoint of this range implies nearly 9% sequential growth.
There’s clearly a significant appetite for Palantir’s AI platform.
During Palantir’s fourth-quarterearnings call CEO Alex Karp said the tone of conversations with U.S. customers has shifted.
The “conversation two years ago was much more, I’ve heard you’re kind of this weird thing that might be able to make it work,” Karp explained. “In general, the conversation now is, I’ve heard you made this work.”
Some concerns to keep an eye on
While growth is obviously explosive, there are reasons to be cautious. For instance, some of Palantir’s forward indicators are no longer accelerating. Total contract value growth, for instance, decelerated from 151% year over year in Q3 to 138% in Q4. And U.S. commercial remaining deal value growth slowed even more sharply, falling from 199% in Q3 to 145% in Q4.
Of course, those are still exceptional growth rates. But when a stock is priced this richly, investors hold the business to higher standards. And a deceleration in these forward-looking metrics suggests that the company’s trend of accelerating growth could eventually flip to one of decelerating growth.
If these forward-looking indicators decelerate even more when the company reports its first-quarter results, Palantir shares could get punished.
The valuation hurdle
So, is Palantir stock’s pullback on Thursday a buying opportunity?
I don’t think so.
Even after Thursday’s decline, Palantir’s market capitalization sits at about $338 billion, and the stock trades at more than 200 times earnings. Even on a price-to-sales basis, the stock’s valuation is hard to wrap your head around. As of this writing, shares trade at 87 times sales. Indeed, even the stock’s forward price-to-earnings ratio, which measures a stock’s price as a multiple of analysts’ consensus forecast for earnings per share over the next 12 months, is sitting at a staggering 118.
In short, shares are wildly expensive. This puts valuation risk front and center for Palantir investors.
So, yes, Palantir still looks like one of the most impressive growth stories in software. The stock, however, still seems to reflect too much optimism, arguably making shares at risk of a significant rerating lower.
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Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies and ServiceNow. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
