The Rule of 40 is a trade-off rule. It says a software business should be able to add revenue growth to free-cash-flow margin and clear 40, and the reason it works as a screen is that the two halves normally pull against each other. Spend to grow and margin falls. Harvest margin and growth falls. A company sitting at 40 is usually 35 of one and 5 of the other, and the interesting question is always which.
Palantir has spent the last six quarters declining to make that choice. In the quarter ended June 2026 it grew revenue 92.8% year over year and converted 62.1% of that revenue into free cash flow. Those sum to 154.9 — nearly four times the threshold the rule was built around, with neither half carrying the other. The quarter itself is covered separately in Palantir's Q2; this is the shape of the run that produced it.
The trade Palantir did not make
Here is the same business four years ago, and the path since. Every figure is quarterly, from the filings.
| Quarter | Revenue | Growth | FCF margin | Rule of 40 |
|---|---|---|---|---|
| 2022 Q3 | $478M | 21.9% | 6.8% | 28.8 |
| 2022 Q4 | $509M | 17.6% | 14.5% | 32.1 |
| 2023 Q4 | $608M | 19.4% | 48.7% | 68.2 |
| 2024 Q4 | $828M | 36.2% | 55.2% | 91.4 |
| 2025 Q2 | $1,004M | 48.1% | 52.9% | 101.0 |
| 2025 Q3 | $1,181M | 62.7% | 42.4% | 105.1 |
| 2025 Q4 | $1,407M | 69.9% | 54.3% | 124.2 |
| 2026 Q1 | $1,633M | 84.7% | 54.6% | 139.3 |
| 2026 Q2 | $1,935M | 92.8% | 62.1% | 154.9 |
In late 2022 Palantir was a Rule of 40 failure — 28.8, below the line, and below it for the ordinary reason: it was growing at 22% and converting almost nothing. The recovery from there did not come from one half. Growth roughly quintupled, from 17.6% to 92.8%. Margin more than quadrupled, from 14.5% to 62.1%. That is the unusual part. A company that fixes its cash conversion normally does it by slowing down.
The acceleration is the second unusual part. Revenue growth of 92.8% is not a small-base artifact — it is being computed against a quarter that itself did over a billion dollars. Palantir is growing faster at a $7.7 billion annual run rate than it was at $2 billion. Trailing twelve months now stand at $6.16 billion of revenue and $3.36 billion of free cash flow.
The one thing that did not keep rising is gross margin. It expanded in five of the last seven quarters, reaching 86.78% in March, then gave back most of that gain to print 84.66% in June. The cash half rose anyway, which locates where the conversion is actually coming from: operating expenses grew 34.2% against revenue's 92.8%, so the leverage is below the gross line, not in it.
What a 155 is and is not
Across the 69 companies on this site with enough history to score, the median Rule of 40 is 35.9 — below the threshold — and 33 clear 40. Palantir's 154.9 is fourth. The three above it are worth naming, because they show what the number can hide:
| Score | Growth | FCF margin | What is driving it | |
|---|---|---|---|---|
| SNDK | 450.6 | 371.6% | 79.0% | A memory-price cycle off a collapsed base |
| MU | 388.1 | 345.7% | 42.4% | The same cycle, in DRAM |
| BE | 181.9 | 165.5% | 16.4% | A fuel-cell order ramp; the cash half is thin |
| PLTR | 154.9 | 92.8% | 62.1% | Operating, both halves |
| NVDA | 144.8 | 85.2% | 59.5% | Operating, and the closest true peer |
Everything above Palantir is a cycle turning rather than a business compounding: Sandisk and Micron are both measured against troughs that reverse, and Bloom's 182 is almost entirely its growth half, on a 16% cash margin that is a fraction of Palantir's. Only Nvidia and Palantir are posting scores in this range from an operating business growing under its own power, and the two are remarkably close — Palantir now carries slightly more of both halves, having passed Nvidia this quarter.
That comparison is the honest use of the number. A Rule of 40 score is a compression of two facts into one, and compressions lose information — the score alone cannot tell you that Sandisk's growth is a rebound and Palantir's is not. It is a screen, not a verdict.
What to watch
- Whether the two halves stay uncoupled. The signal in this history is not the level, it is that growth and margin rose together. The quarter where one is bought with the other is the quarter the story changes.
- Gross margin's next print. June's 84.66% is the first real reversal in two years, and it did not touch the cash half this quarter. A second one would, because operating leverage cannot keep absorbing it.
- The growth base. Deceleration from 92.8% is near-certain and is not itself news — repeating it a year out means finding roughly $1.8 billion of incremental quarterly revenue. Whether the score holds above 100 while it happens is.
Palantir figures are quarterly, from the company's SEC filings: revenue and gross margin from the income statement, free cash flow computed as operating cash flow minus purchases of property and equipment — the same definition applied to every company on this site, described in our Rule of 40 explainer. Peer scores are each company's most recent scoreable quarter and are not all the same quarter; the median and the count of 69 cover every tracked company carrying both a revenue and a free-cash-flow series. Price of $173.96 as of the August 20, 2026 close.
