Nvidia has been the clear undisputed leader of the artificial intelligence (AI) boom, but Palantir Technologies (NYSE: PLTR) isn't far behind.
The data fusion specialist just delivered another smashing earnings report, and if its after-hours gains hold, it will have gained 172% year to date. Along the way, the company has delivered accelerating revenue growth, rapidly built up its commercial business, and gained entry to the S&P 500, thanks to its soaring market cap and its consistent and growing generally accepted accounting principles (GAAP) profitability.
More than any other company, Palantir has also established itself as one of the software companies that's best capitalizing on new AI technologies, in large part due to its Artificial Intelligence Platform (AIP).
The stock jumped 12.6% after hours on Monday, as it reported third-quarter revenue growth of 30% year over year to $725.5 million, which was well ahead of the consensus of $701.1 million. Growth in the U.S. paced the business, up 44% to $499 million, with the U.S. commercial segment driving revenue up 54% to $179 million.
Unlike many of its software peers, Palantir is also highly profitable, with a GAAP operating margin of 16% and an adjusted operating margin of 38%. Its adjusted earnings per share increased from $0.07 to $0.10, ahead of the consensus at $0.09.
The company also raised its full-year revenue guidance from $2.74 billion-$2.75 billion to $2.805 billion-$2.809 billion. The third-quarter results represented Palantir's fifth straight quarter of accelerating revenue growth, an impressive feat even amid the excitement around artificial intelligence.
Image source: Getty Images.
The valuation question
If there were a reason to be skeptical about Palantir stock coming into its report, it would seem to be its valuation. As Palantir has soared this year, its multiple has also expanded.
Coming into the earnings report, Palantir was trading at a sky-high price-to-sales ratio of 40. That kind of valuation typically doesn't end well, but the AI-driven software stock continues to buck the odds with accelerating revenue growth and expanding profitability.
Palantir's model also bodes well for future growth, as it's already built its AI Platform, and the marginal cost of rolling it out to new customers is minimal. In the third quarter, sales and marketing, its biggest individual line item cost, rose 19%, and overall operating expenses were up just 14%, helping the company's GAAP operating income nearly triple.
That margin-expanding pattern looks poised to continue as interest in AI builds, and Palantir's entrenched government relationships and applications in industries like healthcare, manufacturing, and insurance give it an advantage.
The company has been early to integrate with large language models, but CEO Alex Karp argued that LLMs are effectively a commodity, and what makes the company special is that it allows companies and government agencies to run LLMs using their data. Additionally, Palantir says it's already built the AI applications to allow its customers to benefit from the new large language models. Management also noted that the cost of AI inference has fallen sharply, which should encourage more companies to adopt Palantir's AI tools.
How high can Palantir go?
At a revenue run rate of $3 billion, Palantir is still dwarfed by entrenched software companies like Microsoft and Salesforce. However, the company foresaw a $119 billion total addressable market at the time of its IPO in 2020, and that's likely significantly larger today due to the emergence of generative AI.
Given the company's accelerating revenue growth, unique product portfolio, and competitive advantages in AI, Palantir looks well prepared to capture more of that addressable market, as it has less than 3% of that currently.
In other words, it's reasonable to expect the company to double, triple, or even grow its revenue by 10 times over the long run, given the size of the TAM and its current momentum.
If it can continue down that path, the stock will keep moving higher. While it might seem easy to be skeptical of Palantir after its surge this year and high valuation, the company just proved why it's a winner.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft, Nvidia, Palantir Technologies, and Salesforce. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
