The Value of AI Stocks: Why Palantir Could Be the Hottest Way to Play the Next Stage of the AI ​​Rally

Palantir Technologies’ (NYSE:PLTR) shares have been on a roll lately, rising more than 10% recently after the company beat analysts’ expectations with strong Q2 2024 rresults on August 5. The company not only beat forecasts, but also raised its guidance for the full year. The move sent PLTR shares trading 87% higher year-to-date as investors look for top AI stocks to buy as this ongoing rally continues to heat up.

Now, over the past few days, Palantir has seen a slight decline as many AI stocks (led by Nvidia following its earnings report) have taken a small dip. However, Palantir’s strong growth with its AI-based models and its perceived traction among commercial customers is certainly encouraging. There’s also a key partnership with Microsoft (which I’ll get to shortly) that strengthens the case for why this very richly priced stock might actually be worth buying at current levels.

Now, I will point out that Palantir is among the most expensive stocks on the market, and most value investors will immediately rule out any company with a 29x price/sales ratio. But here’s why many investors believe Palantir remains the way to play the next leg of the AI ​​rally higher.

Accelerated growth expected in the future

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Palantir recently reported strong earnings in Q2with revenue rising 27% year-over-year to $678 million and adjusted earnings rising much faster (down 80%) to 9 cents per share, pushing Palantir further into a profitable. Investors may remember that this is a company that has failed to turn a profit for many, many years. Consequently, the consistency with which Palantir has been able to increase margins and see consistent growth is part of the story behind its recent growth.

Perhaps the most important driver of the company’s recent strong growth has been its rapid adoption AI Platform (AIP) by commercial customers. This specific segment led to a 47% increase in US commercial revenue to over $672 million this year. Palantir’s management team continues to see internal expectations for the company’s AI infrastructure sales triple to $600 billion from $200 billion last year. This is an impressive total addressable market and one that investors can clearly support.

Of course, a lot will have to go for Palantir to carve out as much market share as possible in this space. But with 96 deals valued at over $1 million secured last quarter (up almost 50% from the same quarter last year), the trend is clearly in the right direction.

Palantir and Microsoft

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On August 8, Palantir and Microsoft EXTENDED their existing partnership to integrate Palantir’s AI platform with Microsoft Azure Cloud and OpenAI services for the US defense and intelligence community. This collaboration aims to deploy AI and advanced analytics on secure government cloud platforms, enhancing both companies’ capabilities in logistics, contracting and more.

Such a partnership is noteworthy for investors for several reasons. First, this highlights the importance and demand for Palantir’s AIP from mega-cap customers like Microsoft. As the most valuable company in the world (depending on the day), any Microsoft customer is one that investors will immediately focus on. And with Microsoft betting big on AI with its Copilot project, Palantir’s AIP could see even bigger growth if usage grows over time.

Microsoft’s intelligent cloud segment, led by Azure Cloud, increased by 19% year over year and now contributes 44% of Palantir’s total revenue. This partnership certainly seems to be very complementary and could lead to unlocking a range of new applications that investors can benefit from in the long run.

Palantir looks like a speculative buy on the dips

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There are a plethora of AI stocks to consider, but Palantir is clearly among the large-cap names that many investors might think of first when looking for ways to play the long-term growth of this technology. As a big data company that once focused primarily on government contracts (very stable revenue streams but low margins), Palantir’s move into the commercial space has clearly paid dividends. And the company’s AIP launch has done wonders to expand its margins and continue its profitability story going forward.

I don’t know if Palantir will be the next Nvidia in terms of rapid revenue and earnings growth in the coming quarters, but many in the market are pricing in such a possibility. We’ll see how things go from here, and I’d definitely put myself in the more cautious camp when it comes to this stock. But I can also understand the bull thesis behind Palantir, and its recent momentum has been undeniable, with a certain amount of FOMO possibly driving its share price higher.

If the company sees accelerated growth on the top and bottom lines going forward, this is definitely a company that can be a big winner from the next step in the AI ​​revolution.

The post AI Stock Surge: Why Palantir Could Be the Hottest Way to Play the Next Stage of the AI ​​Rally appeared first on 24/7 Wall St.