Why Palantir Shares Soared 17.1% in August

Shares of the big data software leader Palantir Technologies (PLTR -3.08%) rose 17.1 percent in August, according to S&P Global Market Intelligence data.

Last month, the entire tech sector recovered from a selloff that began in late July as recession fears gave way to better economic reports. But what set Palantir’s performance apart, among others, was a truly eye-opening earnings report.

An acceleration of commercial and government contracts

In the second quarter, the excellent numbers included a 27% increase in revenue overall to $678 million and adjusted earnings per share that rose 80% to $0.09, both numbers easily beating expectations.

Revenue growth marked an impressive acceleration of six percentage points from the 21% figure in the first quarter.

Palantir has traditionally been a provider of big data intelligence software for the US government and military and the Central Intelligence Agency. But to justify its high market valuation, it will need to reach commercial customers in the AI ​​era.

The second quarter showed evidence of that. Commercial revenue grew 33%, and US customers took center stage, with US commercial revenue up 55%. Future growth indicators were even stronger than that, as the number of US commercial customers increased by 83%, while remaining transaction value (RDV) increased by 103%.

Palantir often works with clients on pilot programs where the company doesn’t generate much revenue initially, before scaling later. Thus, the increase in the number of customers and RDV indicates an inflection point in the widespread acceptance of its software.

Some may have thought that the rise of generative AI could be a threat to software vendors like Palantir, as the technology could allow companies to build their own tools. But management believes that moving from pilot to production with AI is far more complex than most businesses can handle. Chief Revenue Officer Ryan Taylor said on a conference call with analysts:

While many companies can build prototypes, the leap from prototype to production is substantial. Palantir has made this leap. Our focus is on AI implementation and enterprise manufacturing, solving meaningful problems for our customers.

Palantir just started?

Make no mistake, Palantir is a really expensive stock, trading at 30 times sales. But the last quarter did much to quiet the naysayers, with an apparent inflection point in customer adoption and expansion. In addition, management said more software platforms are coming, such as a product called Warp Speed ​​aimed at high-end industrial and manufacturing companies.

Therefore, investors will have to balance the company’s bright growth prospects with its premium valuation, which is a difficult endeavour.