Concerns were raging earlier this year that the artificial intelligence revolution was overhyped and AI stocks were due for a reckoning.
It certainly felt like that were true this spring, when stocks got battered amid worries over peak AI spending and growing fear that the US economy was destined for recession.
The risk-off environment led to a 24% drop in the technology-laden Nasdaq, and even bigger losses for individual stocks like Palantir Technologies, which tumbled 47% from its February peak to April’s low.
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Those concerns, however, have yet to materialize, and stocks, including Palantir, have produced substantial returns since April 8.
The Nasdaq has rallied nearly 40% and Palantir, which is increasingly being viewed as an AI lynchpin, has seen its stock price more than double.
The reality is that while concerns remain, there’s little to suggest that companies are tapping their brakes on AI investments, and Palantir’s latest quarterly results and guidance suggest spending strength will continue to prop up its business this year.
Image source: Bloomberg/Getty Images
Palantir goes from defense dynamo to AI kingpin
The first wave of AI development centered on large language models, or chatbots, that could digest huge data sets and parse data based on user questions, including OpenAI’s ChatGPT, Anthropic’s Claude, Perplexity, and Google’s Gemini.
The spending on network infrastructure to support creating those chatbots was enormous, with hundreds of billions flowing out of enterprises and cloud service providers, including hyperscalers, to buy semiconductor chips from Nvidia and servers from Super Micro and Dell.
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While that spending is likely to continue, R&D is increasingly shifting to the second wave of AI — solutions like agentic AI that can be used to assist and in some cases replace workers across industries.
Developing those AI apps, however, isn’t easy, especially since it requires breaking down data silos to find solutions securely. To do that, companies need help, and increasingly, they’re turning to Palantir’s Artificial Intelligence Platform.
Palantir’s (PLTR) roots stretch back to the early 2000s, when the Peter-Thiel founded company was tasked with securing data for the Defense Department. It still does a ton of work for the government, but recently, its seen explosive demand for AIP within companies using Palantir’s Foundry platform.
As a result, Palantir’s sales and earnings are surging.
Palantir delivers breakneck growth in the second quarter
The company’s second quarter earnings results show solid and growing demand for its service.
Palantir’s revenue jumped 48% year-over-year to $1 billion, $61 million better than Wall Street was expecting. As a result, earnings per share (EPS) increased to 16 cents per share, 2 cents higher than analysts forecast, and up 78% from one year ago thanks to improving profit margins.
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Government deals contributed to the revenue beat, but the real shining star during the quarter was demand from corporations.
US sales were up 68% from last year, reaching $733 million. US government revenue rose 53% to $426 million, while commercial revenue surged 93% to $306 million.
“It’s a blowout across the board. I mean, look, that’s why they’re the Messi of AI, right? I mean, it just speaks to, this is transformational, the type of growth they’re seeing,” said Wedbush Securities influential technology analyst Dan Ives on Yahoo!Finance. “I’ve covered tech 25 years. This is unprecedented territory. It speaks to our view. It’s a trillion dollar market cap in the next two to three years.”
The company closed contracts worth a record $2.27 billion, including commercial deals worth $843 million, up 222% from one year ago.
Net income of $327 million helped its cash and investment securities stockpile grow to above $6 billion from about 5.2 billion coming into the year.
That’s a lot of financial flexibility, especially given that the company is debt free.
The growth rate of our business has accelerated radically, after years of investment on our part and derision by some,” said CEO Alex Karp. “The skeptics are admittedly fewer now, having been defanged and bent into a kind of submission. Yet we see no reason to pause, to relent, here.”
Palantir guidance outpaces Wall Street forecasts
The company’s CEO, Alex Karp, expects the good times to not only continue but accelerate.
Palantir raised its full year revenue guidance to between $4.142 billion and $4.15 billion. Consensus analyst forecasts were targeting $3.9 billion.
For a startup, even one only a thousandth of our size, this growth rate would be striking,” said Karp. “For a business of our scale, however, it is, we continue to believe, nearly without precedent or comparison.”
Palantir expects commercial deals to continue to be the big driver, guiding for US commercial revenue of $1.3 billion, up at least 85%.
Palantir is also targeting adjusted income from operations of $1.912 billion to $1.92 billion and it raised its adjusted free cash flow guidance to between $1.8 billion to $2 billion.
Overall, it expects to remain profitable throughout 2025. Currently, Wall Street consensus targets full year EPS of 58 cents, up from 55 cents ninety days ago. It wouldn’t be surprising to see those earnings estimates climb more in the coming days following the updated guidance.
Palantir has a high bar to clear given its valuation
Following the second-quarter results, Palantir’s shares are up 4.6% to $168, a new all-time high.
That move isn’t going to let those concerned about the company’s valuation sleep any better. Palantir was already trading with a forward price to earnings ratio (a key valuation measure) of 276, making it among one of priciest stocks out there. For comparison, the S&P 500’s forward P/E is 22.4.
Technology stocks often command higher than normal valuations, but even the price to sales ratio is arguably stretched, given shares are trading at about 123 times sales.
Given that backdrop, Palantir is arguably priced to perfection, so it will need to continue to put up similarly eye-popping growth from here to keep investors happy.
Todd Campbell owns Palantir shares.
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