Shares of Palantir Technologies look on track to extend their slide Wednesday after RBC Capital Markets analyst Rishi Jaluria downgraded the stock, warning of “cracks emerging in the story.”

Jaluria is concerned about a deceleration in Palantir’s government business as shown in the company’s Tuesday morning earnings commentary. While Jaluria had anticipated a slowdown, he noted that the growth rate for this part of the business was almost cut in half relative to the second quarter.

Palantir executives called out 34% growth in government revenue during the third quarter, while this segment was up 66% in the second quarter.

“We believe Palantir got direct benefits from COVID-related spending and those benefits have already faded,” Jaluria wrote in his note to clients, while lowering his rating on Palantir’s stock to underperform from sector perform and cutting his price target to $19 from $25.

Shares of Palantir are off more than 2% in premarket trading Wednesday.

Jaluria also said that while Palantir’s commercial business continues to accelerate, he believes some of the growth there is due to a program through which the company makes strategic investments in earlier-stage businesses that then use its technology. “We do not believe revenue from SPAC investments is sustainable, especially given the relatively small size of the companies Palantir is investing in,” he wrote.

Palantir’s management team continues to expect revenue growth of at least 30% for this year and the following four years, but Jaluria views this target as “hard to underwrite” given the deceleration in the government business and his estimation of the impact that SPAC investments are having on commercial growth.

“We still believe Palantir has good technology and strong customer government relationships, but given the valuation, would like to see additional proof points of clean, sustainable 30%+ growth before getting more constructive,” he wrote.

Palantir shares have added 5.8% over the past three months as the S&P 500
SPX,
-0.35%

has gained 5.6%.

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