Is the deal between Palantir Technologies and Microsoft a game changer?

Arguably the most important secular tailwind to emerge since the beginning of last year has been the rapid adoption of artificial intelligence (AI). This is driving an ongoing paradigm shift in business as companies figure out how to best benefit from these next-generation algorithms.

What sets generative AI apart from its predecessors is its versatility. These AI systems can be used to generate images, create stories, summarize data and create presentations, all with a few simple instructions. Additionally, its ability to find patterns in data and streamline time- and memory-consuming tasks is known as the “fourth industrial revolution” and could dramatically change the way business is done. Managers everywhere are working to secure their share of the potential profit.

Now, enterprise software and cloud titan Microsoft (NASDAQ: MSFT) and pioneer of AI and data analytics Palantir Technologies (NYSE: PLTR) joined forces to develop cutting-edge AI solutions for the US government.

A dynamic duo

In a press release Thursday, Palantir and Microsoft announced the expansion of their existing partnership to “bring some of the most sophisticated and secure cloud, AI and analytics capabilities to the US defense and intelligence community.”

The goal of the partnership is to create a “first-of-its-kind integrated technology suite” that includes Microsoft’s Azure Cloud and OpenAI services and Palantir’s Artificial Intelligence Platform (AIP) in the government’s secure cloud.

By joining forces, Palantir will deploy Gotham, Foundry, Apollo and AIP on Microsoft’s Azure Government, Government Secret and Top Secret Cloud platforms. Palantir will also adopt Azure’s OpenAI service in these secure cloud environments.

The resulting integrated solution will enable government users to build AI systems for a variety of applications, including logistics, contracting, prioritization, action planning and more.

What sets this deal apart is the inclusion of Palantir’s AIP. Management has found that many users are reluctant to take the AI ​​plunge because they simply don’t know where to start. The company has begun hosting bootcamps, or sessions that pair users with Palantir engineers to create these systems to solve real-world problems.

The program has been tremendously successful, with many clients signing sizeable contracts within days or weeks of attending a training session. This strategy could work just as well for government users.

A win-win situation

Both Palantir and Microsoft have made a name for themselves in the rapidly growing field of AI.

The story continues

The success of Palantir’s aforementioned strategy has been evident in its recent results. In the second quarter, revenue of $678 million was up 27% year-over-year, and Palantir turned a profit for the seventh straight quarter — but there was a lot more going on under the hood.

The company’s government revenue — which tends to be windfall — rose 23 percent year-over-year, while commercial revenue rose 33 percent. This was fueled by the US commercial segment, which has become Palantir’s fastest-growing business, with revenue up 83% year-over-year and now expected to grow at least 47% in 2024.

The engine behind this growth was AIP. Palantir recently revealed that it has hosted bootcamps for more than 1,025 organizations in the past year, far exceeding its original plans for 500. The results have been amazing, as Palantir has provided several examples of seven-figure deals signed in several days or weeks after the campaign. completion. This helps illustrate how successful this new strategy has been.

For its part, Microsoft has been quick to adopt generative AI and developed Copilot, a suite of AI-powered assistants designed to simplify and streamline time-consuming administrative tasks. In the fourth quarter of 2024 (ended June 30), Microsoft said the number of people using Copilot at work doubled quarter-on-quarter. This contributed to robust growth as revenue of $64.7 billion rose 15% year over year, while earnings per share (EPS) of $2.95 rose 10%.

Microsoft’s biggest growth driver was the intelligent cloud segment, which grew 19% year over year and now accounts for 44% of total revenue. At the heart of the segment is Azure Cloud, which grew by 29%. The company also noted that eight points of that growth was the result of AI services. Microsoft also said that demand continued to exceed “our available capacity.” It’s worth noting that Microsoft’s cloud growth continues to outpace that of its rivals, with much of the credit going to AI.

This helps illustrate that Palantir and Microsoft are both benefiting from the massive opportunity of generative AI, even as rivals lag behind.

Is the business a game changer?

One of the most exciting prospects of this partnership is the complementary capabilities of these two AI superstars and the large number of applications that the collaboration will enable. Microsoft’s secure, government-approved cloud will house Palantir’s decades of AI expertise and its cutting-edge AIP. Additionally, Palantir’s onboarding campaign strategy could attract users and use cases that might otherwise be missed.

Given their growth prospects and the opportunity to profit from AI, each of these stocks represents a compelling opportunity.

Microsoft currently sells for 30 times forward earnings, just a slight premium to the 28 multiple for S&P 500.

At 82 times forward earnings, Palantir might seem prohibitively expensive, but those numbers don’t account for the company’s accelerating growth. Using the forward price/earnings-growth (PEG) ratio gives a more accurate picture, revealing a multiple of 0.3 – when any number less than 1 suggests an undervalued stock.

This offering benefits both partners across the spectrum of their AI offerings. Microsoft can take advantage of Palantir’s existing AI partnerships with US government agencies, while Palantir benefits from the expansion of those existing revenue streams as well as the accelerated adoption of AIP in the defense and intelligence communities. As such, this business TO it actually reaches game-changing levels, but only time will tell.

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Danny Vena has positions in Microsoft and Palantir Technologies. The Motley Fool has positions in and recommends Microsoft and Palantir Technologies. The Motley Fool recommends the following options: long $395 January 2026 Microsoft calls and short $405 January 2026 Microsoft calls. The Motley Fool has a disclosure policy.

Is the deal between Palantir Technologies and Microsoft a game changer? was originally published by The Motley Fool