By Adam Levine

During Palantir Technologies' third-quarter earnings call this past week, CEO Alex Karp began his presentation with a characteristically bold claim. "These are arguably the best results that any software company has ever delivered," he said. "And it's not so hyperbolic."

Indeed, Palantir's results were impressive, whether compared with other companies or its own history of growth. But was it the best quarter ever for a software company? And how would we even measure that?

Venture capitalists have long loved investing in software companies because they combine the best of both worlds -- sales growth and cash flow.

Those investors like to talk about the Rule of 40, the idea that sales growth plus profit margin should be over 40% -- and the more the better. The Rule of 40 captures both sides of what investors like about software stocks in a single metric. And Karp frequently uses the yardstick when discussing Palantir's results.

Sure enough, Palantir's third quarter shined on a Rule of 40 basis. Its 63% revenue growth was accompanied by a 42% free cash flow margin for a Rule of 40 score of 105. That edged out the company's 101 score from the previous quarter.

It's outstanding, but it isn't the best quarterly report ever. In fact, it wasn't even the best over the past week. Here are a few quarters in software history that outrank Palantir's latest results:

Zoom Communications, 2020-21

I understand why Karp left out Zoom Communications' performance during the early quarters of the Covid-19 lockdown, because, frankly, I had forgotten about them as well. When hundreds of millions of people began using videoconferencing every day in 2020, Zoom sales boomed. Revenue growth averaged 363% over the three quarters from May 2020 to January 2021. The company converted 49% of sales to free cash flow over that period, for an average Rule of 40 score of 413.

All told, Zoom had eight quarters with scores above 100, and three over 400.

In the end, Zoom didn't have much of a moat, and Microsoft and Google bundled competing products with their productivity suites, cutting off the company's oxygen. Since Zoom reported its peak Rule of 40 quarter in November 2020, the stock's value has dropped 83%, a period in which the S&P 500 returned 100%.

Other Pandemic Outliers

Several other pandemic-era quarters also bested Palantir's latest results. In its March 2021 quarter, business software company Atlassian grew sales 38% with a whopping 70% free cash flow margin. At the time, company executives warned investors not to get used to those kinds of numbers, and indeed they were right.

Since those results, Atlassian stock has lost 36% versus a total return of 74% for the S&P 500.

Pandemic trends also drove Shopify to some of the best quarterly performances on record. During the first full quarter of lockdown in the spring of 2020, Shopify posted a 104% growth rate coupled with a 21% free cash flow margin. Shopify hasn't topped those numbers since, but it has averaged a 50 Rule of 40 score since.

It's another reminder that one quarter doesn't make a stock. Shopify's total annualized return since it reported its spring 2020 quarter is 10.4%, versus 16.7% for the S&P 500 index.

AppLovin, Nov. 5, 2025

By the Rule of 40 measure, Palantir's third quarter wasn't even the best software performance of the past week. On Wednesday afternoon, digital ad platform AppLovin blew away already-high expectations with third-quarter sales growth of 68% on top of a 75% free cash flow margin for a 143 score, topping its 138 in the second quarter.

AppLovin CEO Adam Foroughi was rather muted in his characterization of the results, calling it "another very good quarter."

Microsoft, Jan. 18, 1996

In the quarter that ended in December 1995, Microsoft grew sales 48% to $2.2 billion ($4.2 billion in today's dollars), thanks to the release of Windows 95. Some 60% of those dollars turned into free cash flow. It's a particularly remarkable feat given that Microsoft was already a mature company in 1995, larger than any of the others mentioned in this column.

Since Microsoft reported that December quarter, the stock's total return has been 18.2% a year, versus 10.4% for the S&P 500.

So, what does this all mean for Palantir? For one thing, it has a very effective CEO who is unfiltered -- and prone to bouts of hyperbole. That's worth keeping in mind as Palantir makes its pitch for changing the world.

And yet, there's reason to think Palantir is different, even when compared with some of the stellar companies described above. Palantir has built a base of customers that is unlikely to dry up soon. Its strength has long been in government contracts, and those sales continue to grow quickly.

Palantir's solid base is being supercharged by growth from U.S. commercial customers seeking its artificial intelligence-driven services. U.S. enterprises made up 34% of the company's third-quarter revenue, up from 25% the year before. Palantir still has a long runway in this new commercial market.

The company will need that momentum to continue if it hopes to reprise its latest quarter.

Write to Adam Levine at adam.levine@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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November 07, 2025 15:59 ET (20:59 GMT)

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