Palantir Technologies’ (NYSE:PLTR) stock has been on a tear of late, recently surging more than 10% after the company surpassed analysts’ expectations with strong Q2 2024 results on August 5. The company not only beat forecasts but also raised its full-year guidance. This move has resulted in PLTR stock trading 87% higher on a year-over-year basis, as investors look for top AI stocks to buy as this ongoing rally continues to pick up steam.

Now, in recent days, Palantir has seen a slight dip as many AI stocks (led by Nvidia following its earnings report) took a bit of a fall. However, Palantir’s strong growth with its AI-driven models, and its traction seen among commercial customers, is certainly encouraging. There’s also a key partnership with Microsoft (which I’ll get to in a bit) which is strengthening the case as to why this very richly-priced stock could actually be worth buying at current levels.

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

Accelerated Growth Expected Moving Forward

Palantir recently reported strong Q2 earnings, with revenue growing 27% year-over-year to $678 million, and adjusted earnings rising much faster (at an 80% clip) to 9 cents per share, pushing Palantir further into profitable territory. Investors may remember that this is a company that failed to produce a profit for many, many years. Accordingly, the consistency with which Palantir has been able to boost margins and see consistent growth is part of the story behind its recent surge.

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

Of course, a lot will need to go right for Palantir to carve out as much market share as it can in this space. But with 96 deals valued at more than $1 million secured last quarter (nearly 50% higher compared to the same quarter the year prior), the trend is clearly in the right direction.

Palantir and Microsoft

On August 8, Palantir and Microsoft expanded their existing partnership to integrate Palantir’s AI Platform with Microsoft’s Azure Cloud and OpenAI services for the U.S. Defense and Intelligence Community. This collaboration is aimed at deploying advanced AI and analytics across secure government cloud platforms, enhancing both companies’ capabilities in logistics, contracting, and more.

Such a partnership is noteworthy for investors for a number of reasons. For one, this highlights the prominence and demand for Palantir’s AIP from mega-cap clients like Microsoft. As the most valuable company in the world (depending on the day), any customer of Microsoft is one that investors are going to immediately hone in on. And with Microsoft betting big on AI with its Copilot project, Palantir’s AIP could see even greater growth if usage increases over time.

Microsoft’s intelligent cloud segment, led by Azure Cloud, grew 19% on a year-over-year basis and now contributes 44% of Palantir’s total income. This partnership certainly seems to be very complementary, and could result in the unlocking of a range of new applications investors can benefit from long-term. 

Palantir Looks Like a Speculative Buy On Dips

There are a myriad of AI stocks to consider, but Palantir is clearly among the large-cap names that many investors may think of first when they look at ways to play the long-term growth of this technology. As a big data company which was once focused mostly on government contracts (very stable revenue streams, but low margins), Palantir’s shift into the commercial realm has clearly paid dividends. And the company’s AIP launch has worked wonders for expanding its margins, and continuing the profitability story moving forward.

I don’t know if Palantir will be the next Nvidia in terms of seeing the kind of rapid revenue and earnings growth acceleration in the coming quarters, but many in the market are clearly pricing in such a possibility. We’ll see how things go from here, and I’d certainly 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 some amount of FOMO likely driving its share price higher.

If the company does see accelerating growth on the top and bottom lines moving forward, this is certainly a company that may be a big winner from the next leg higher in the AI revolution.

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