Artificial intelligence (AI) has been around in some form or fashion for over 50 years, but recent developments in the field of generative AI have attracted the attention of Wall Street and Main Street alike. These new AI systems have the ability to refine and distill massive amounts of data, create original content, and streamline processes -- thereby increasing productivity. Potential applications abound, and individuals, businesses, and governments are all looking for ways to cash in on AI.
One of the undeniable beneficiaries of this trend is Palantir Technologies (PLTR 1.56%). The company has risen from near obscurity to be one of Wall Street's hottest properties. The stock is up 85% so far this year and boasts gains of 1,760% since the dawn of generative AI in late 2022.
While some investors fear Palantir's growth will eventually fade, recent developments help illustrate the long runway ahead and why the stock might still be a buy, despite its astronomical valuation.
Image source: Getty Images.
Expanding relationships
Investors may recall that in May 2024, Palantir was awarded a $480 million, five-year contract by the U.S. Army for its Maven Smart System. The system integrates data from satellites, drones, and other intelligence sources, using AI and computer vision to scan the battlefield and identify enemy targets. The cutting-edge system also helps prioritize and track the movement of enemy systems, as well as identifying friendly forces in the area. By providing real-time data, Maven gives analysts actionable intelligence.
Military leaders were so impressed with the system that in September, they added a $99.8 million addendum to the contract, expanding access to the Maven system across all branches of the U.S. military, including the Army, Air Force, Space Force, Navy, and Marine Corps. The expanded access improves the interaction and operational capabilities between different branches of the service.
There's more. By May 2025, Pentagon leaders boosted the contract value by an additional $792 million over four years, bringing the total value of the project to more than $1.3 billion through 2029. A defense official cited the "growing demand" for the system as the catalyst for the increasing contract size.
This contract is only one of many, but it helps to illustrate one of Palantir's secret weapons: that of "increasing demand." When users -- military or enterprise -- get their hands on Palantir's systems and actually use them, they begin to understand the myriad ways the system can be deployed. This leads to new users and additional use cases, and ultimately leads to Palantir expanding its relationships with existing customers.
Finally, word broke this week that the U.S. Army is "laying the groundwork for a sweeping expansion of its AI capabilities," according to Military.com. The service is developing a military occupational specialty (MOS) focused on AI. The career field, designated 49B, will be focused on AI and machine learning, which shows that the U.S. military is increasingly betting on AI as the future of modern warfare. As a leading provider of AI tools to the U.S. Army, Palantir will likely benefit from this development.
Proof of concept
Palantir introduced its Artificial Intelligence Platform (AIP) in April 2023, which helps businesses "leverage the power of large language models (LLMs) on their own privately held datasets." The company then adopted a strategy that has proven wildly successful since its introduction. To capitalize on the unprecedented demand for AIP, the company began hosting boot camps, "immersive, hands-on-keyboard sessions" that pair customers with Palantir engineers, which allows them to "go from zero to use case in just one to five days."
NASDAQ: PLTR
Key Data Points
Because users experience the platform firsthand, they quickly understand the value AIP can bring to their organization and its ability to solve company-specific business challenges. Furthermore, once these AI systems are established within an organization, chances are good that the company will ultimately expand its relationship with Palantir.
Don't take my word for it. In the first quarter, Palantir's revenue of $884 million grew 39% year over year and 7% quarter over quarter -- but that only tells part of the story. U.S. commercial revenue, which includes AIP, grew 71% year over year and 19% quarter over quarter, and now accounts for 41% of Palantir's total sales -- not bad for a product that's only been around for about two years.
There's more good news: Palantir's so-called "Rule of 40" score, which evaluates the company's revenue growth in relation to its profits, clocks in at 83%, showing a healthy balance of growth and profitability. That's up from just 38% less than two years ago and illustrates the quality of Palantir's earnings.
To close out the quarter, Palantir's remaining performance obligation (RPO), or contractually obligated sales that haven't been recognized as revenue, jumped 46% to a record $1.9 billion, while the remaining deal value (RDV) of its U.S. commercial segment soared 127% to $2.32 billion. This gives investors visibility into Palantir's future and helps illustrate that its growth streak still has room to run.
There's no such thing as a free lunch
Palantir's track record of success and the unprecedented demand for its services come with a hefty price tag. The stock currently sells for a lofty 82 times forward sales and 234 times forward earnings. This is enough to make some investors run for cover, but the most commonly used valuation metrics tend to struggle with high-growth stocks.
Because of its high multiples, Palantir stock is prone to wild swings of volatility and, as such, won't be a good fit for every investor. However, as my colleague Adia Cimino points out, valuations don't provide a complete picture, and "If you refused to buy these companies because of their high valuations, you might have missed out on owning some of the world's most successful technology stocks."
There's little question that the adoption of AI is just getting started. Given Palantir's industry-leading government and enterprise-level AI solutions and its track record of expanding relationships, I would posit that these recent developments could help drive the stock to new heights. Those concerned about its valuation should consider buying just a small stake to start, or dollar-cost averaging into a position over time.
