Why Palantir Stock Rallied 17.1% in August

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

Last month saw the entire tech sector recover from a big sell-off that began in late July, as recession fears gave way to some better economic reports. But what differentiated Palantir’s performance among others was a truly eye-opening earnings report.

An acceleration across commercial and government contracts

In the second quarter, the stellar numbers included revenue growth of 27% overall to $678 million, and adjusted earnings per share that rose 80% to $0.09, with both figures handily beating expectations.

The revenue increase marked an impressive six-percentage-point acceleration over the 21% figure in the first quarter.

Palantir has traditionally been a supplier of big-data intelligence software to the U.S. government and military, and the Central Intelligence Agency. But to justify its lofty market valuation, it will have to catch on with commercial customers in the age of AI.

The second quarter showed evidence of that in spades. Commercial revenue was up 33%, and U.S. customers took center stage, with U.S. commercial revenue surging 55%. Indicators of future growth were even stronger than that, as the U.S. commercial customer count increased 83% while remaining deal value (RDV) rallied a whopping 103%.

Palantir often works with customers on pilot programs in which the company doesn’t generate much revenue initially, before it expands later on. Thus, the rise in customers and RDV indicates an inflection point in widespread acceptance of its software.

Some might have thought the advent of generative AI could be a threat to software suppliers like Palantir, since the technology could enable companies to build their own tools. But management believes that going from pilot to production with AI is way more complex than most enterprises can handle. Chief revenue officer Ryan Taylor said on the conference call with analysts:

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

Is Palantir just getting started?

Make no mistake, Palantir is a really expensive stock, trading at 30 times sales. But the past quarter did a lot to quiet the naysayers, with a seeming inflection point in customer adoption and expansion. Furthermore, management said even more software platforms are coming, such as a product called Warp Speed, geared toward next-generation manufacturing and industrial companies.

Therefore, investors will have to balance the company’s bright growth prospects against its premium valuation, which is a tricky endeavor.