Is Palantir Stock a Buy on Its Microsoft Partnership?

Well into the third quarter of 2024, the artificial intelligence (AI) industry is still a key driver of the action on Wall Street, as tech giants and startups compete for dominance in this rapidly evolving field. The global AI market is projected to reach $184 billion in 2024, and potentially contribute around $15.7 trillion to the global economy by 2030. AI adoption has more than doubled since 2017, and projections that 34.8% of businesses — over 1.3 million — will be using AI by 2040 to drive innovation suggest a significant new phase in enterprise technology has emerged. 

Palantir Technologies (PLTR), a key player in enterprise software and security since 2003, has grabbed headlines following its collaboration with Microsoft (MSFT), announced shortly after PLTR's latest quarterly earnings in early August. This partnership has fueled major investor optimism, boosting Palantir's stock by more than 6% over the past week alone.

And the timing of this partnership is certainly significant, given the increasing focus on AI technologies in both public and private sectors. Analysts, including noted Palantir bull Dan Ives of Wedbush, view this collaboration as a potential game-changer for Palantir - particularly in the federal sector, where its Artificial Intelligence Platform (AIP) could gain broader traction. 

So, is Palantir stock worth buying? Let’s analyze Palantir's market performance and growth potential, as well as the experts' opinions on its future outlook.

Palantir's Soaring Stock Price in 2024

After a lengthy period of underperformance, Palantir Technologies (PLTR) has been capitalizing on the stock market's AI boom. The stock has racked up an an 81.8% gain year-to-date, and a 103.1% return over the past 52 weeks. 

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The company now boasts a market capitalization of $69.01 billion and an enterprise value of $68.20 billion, solidifying its position among the top data analytics and AI software players. However, this lofty valuation comes with high expectations, as reflected in the company's valuation metrics.

Palantir's forward price/earnings (P/E) ratio is 87.25, on an adjusted basis, while its price/sales ratio is 25.16. Both metrics are exponentially higher than the corresponding tech sector medians, which means that investors will pay a premium for PLTR's future earnings growth at current prices. The company's PEG ratio is around 3.63, indicating the valuations are relatively steep even when weighed in the context of PLTR's expected growth potential. 

While such high multiples might raise eyebrows in other sectors, they're not uncommon for high-growth tech companies, especially those at the forefront of AI and data analytics. In fact, PLTR's current forward P/E is actually a discount of about 27% to its historical average valuation, to put the current reading even further into perspective. 

PLTR Pops After Q2 Earnings

Palantir's financial performance has been as impressive as its price action lately. In its Q2 2024 earnings report, the company announced 27% year-over-year revenue growth, reaching $678 million. More notably, Palantir achieved a record-high GAAP earnings per share of $0.06, marking its seventh consecutive quarter of GAAP profitability. This consistent profitability is a significant milestone for a company in the AI niche, which often prioritizes growth over immediate profits.

U.S. commercial revenue, excluding strategic commercial contracts, surged to $159 million, up an impressive 55% year-over-year. This growth in the commercial sector is particularly encouraging, suggesting that Palantir is diversifying its revenue streams beyond its core business of government contracts. Moreover, the company's bottom-line performance exceeded analyst expectations, with earnings per share of $0.09 beating the forecast of $0.08.

After a strong second quarter, Palantir raised its full-year guidance, with revenue now projected between $2.74 billion and $2.75 billion, and adjusted operating income expected to hit $970 million at the midpoint. These numbers show the company's confidence in maintaining its growth momentum.

Strategic Partnerships and Expansion in AI

On Aug. 8, PLTR followed up its 10% post-earnings rally with another 11% surge as the company unveiled plans to team up with Microsoft to boost AI and analytics services for U.S. government agencies, especially in classified networks crucial for national security. 

This partnership involves rolling out Palantir's suite of products — Foundry, Gotham, Apollo, and AIP — on Microsoft's Azure Government and classified cloud environments. They're also integrating Microsoft's large language models (LLMs) into Palantir's AI platforms via Azure OpenAI Service, paving the way for AI-driven operational workloads in defense and intelligence sectors. Investors were thrilled, with PLTR stock closing last week above $30 per share for the first time since February 2021 on the news. 

An exciting aspect of this announcement is Palantir's commitment to providing boot camps for government agencies trying out the technology. These boot camps have been vital in commercial clients adopting Palantir's AIP since its launch last year. By collaborating with users to develop specific solutions to real-world problems, Palantir engineers help agencies become self-sufficient in AI solution development.

Elsewhere, Palantir has teamed up with Surf Air Mobility in another strategic move to implement its Foundry operating system. This initiative is designed to enhance Surf Air's operations and speed up the adoption of sustainable aviation. By entering the aviation sector, Palantir is expanding its market reach and contributing to sustainability efforts. 

Analyst Forecasts for PLTR

Dan Ives from Wedbush is optimistic about Palantir, especially after its recent partnership with Microsoft. He sees this collaboration as a "launching pad" for Palantir's AIP platform, potentially increasing its reach in the federal sector. Ives rates the stock as "outperform," with a Street-high price target of $38 - implying expected upside of 21.7% from Thursday's close. 

Despite these positive projections, analyst ratings for Palantir are decidedly mixed. The mean target price is $23.73, a notable 24% downside from current levels. Out of 15 analysts, the consensus is a "hold," with 3 recommending a “strong buy,” 1 a “moderate buy,” four a “hold,” 1 a “moderate sell,” and six a “strong sell.” 

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Conclusion

So, is Palantir stock a buy on its Microsoft partnership? The short answer is: cautiously, yes. The Microsoft deal is a big win, potentially turbocharging Palantir's presence in the federal AI space. Couple that with solid financials and expanding commercial partnerships, and Palantir looks poised for growth. 

However, the stock has already had a massive run-up, and analysts' opinions are mixed. If you're bullish on AI and can stomach some potential volatility, Palantir could be a solid bet to consider.

On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.