Will a new Microsoft partnership help launch Palantir stock on the moon?

Days after reporting strong second-quarter results, Palantir TECHNOLOGY (PLTR 2.75%) gave investors even more good news when it announced an expanded partnership with Microsoft (MSFT -0.61%). The goal is to sell analytics and artificial intelligence (AI) services to various defense and intelligence agencies within the federal government.

Palantir built its reputation helping US government intelligence agencies track and fight terrorism through its data collection and analytics platform, but government has actually become one of the company’s weak points over the past two years. Let’s look at how this deal could change that.

Seeks to boost federal government sales

The US government has long been Palantir’s biggest customer, though its growth has become a weak point for the company. Total government revenue growth, including foreign governments, fell to 19% in 2022 and just 14% in 2023.

It has seen some rebound this year, with total government revenue up 23 percent year-over-year to $371 million in the second quarter and U.S. government up 24 percent to $278 million.

However, it lagged behind its faster-growing commercial segment, which saw year-over-year growth of 33% to $307 million in the quarter. US commercial revenue, in particular, grew even faster, up 55% to $159 million.

This partnership with Microsoft will look to jump-start growth in its US government segment. Palantir’s entire suite of products will now be able to be deployed using Microsoft’s government cloud, including Microsoft Azure Government, Azure Government Secret, and Azure Top Secret cloud. The partnership will also leverage Azure’s OpenAI Service and integrate its large language models, including GPT-4, into Palantir Foundry software and its Artificial Intelligence Platform (AIP).

One of the big goals of the partnership will be to help speed up implementations, especially with AIP. In conjunction with Microsoft, the company will hold boot camps to allow the defense and intelligence community to test the technology.

Palantir has had great success driving new customer acquisition with its bootcamps in the commercial sector and will look to take that to the federal sector as well. These workshops provide training and demonstrate how AIP can be applied to mission critical operations and other potential uses.

One downside to Palantir’s government business is that it can be contract work for specific projects. If the company can begin to integrate AIP into more government tasks, it can help create a more sustainable and reliable recurring revenue stream. Providing AI services to various government defense and intelligence agencies is a huge opportunity for the company, and Microsoft’s partnership should make it easier to get approvals.

Image source: Getty Images.

Is the stock a buy?

Palantir has proven the power of its technology, but the one thing keeping many investors wary is its valuation. The stock trades at a forward price-to-sales (P/S) ratio of about 20 times, based on analyst estimates in 2025.

PLTR PS report (Before 1a); data by YCharts.

For a company growing revenue below 30%, that’s a pretty expensive multiple. To justify this, they would have to speed it up over 30%. Palantir has started to see a rebound in its US government business, and this new partnership could reinvigorate that even more. But based on its current valuation, it looks like the market is already pricing in the stock.

I think Palantir has a good long-term opportunity, but given its valuation, I’d rather be a pullback buyer. Even the best tech companies go through periods where their stock price drops, and I’d rather be patient and not watch the stock at these valuations.