One of the leading themes fueling the capital markets to new highs this year is artificial intelligence (AI). While much of the AI narrative is captured by mega-cap technology behemoths in the "Magnificent Seven," other players are emerging on the scene.
Over the last couple of years, enterprise software company Palantir Technologies (NYSE: PLTR) has proven it can play ball on AI's biggest stage, which has helped the company land on the radar of the tech sector's most important leaders.
Let's dig into Palantir's new partnership with Microsoft and assess why this relationship could be transformative for Palantir.
A nice picture with a little blemish
Palantir offers a host of data analytics capabilities through its various software tools. The company sells its products both to the private and public sectors. While Palantir's revenue and profit metrics pictured below look encouraging, there is one subtle blemish with the company's operation.
Palantir's commercial business is its fastest-growing segment. But a bifurcated look at the company's entire business shows that roughly 54% of total revenue so far this year stems from government contracts.
Government business can be very lumpy, making it difficult for investors to forecast. Relying heavily on the public sector may be unattractive to some investors, as trends in revenue and cash flow are often inconsistent.
However, I think Palantir's deal with Microsoft may be able to help mitigate some of these concerns.
How are Microsoft and Palantir working together?
Microsoft is an enormous company with operations spanning across personal computing, workplace productivity, gaming, and social media. However, one of the company's most important businesses is its Azure cloud computing platform.
Microsoft and Palantir recently teamed up in an effort to bridge Azure's cloud infrastructure with Palantir's AI software. Specifically, Palantir's Artificial Intelligence Platform (AIP) will be integrated with Microsoft's Azure Government and Top Secret cloud details.
Per the press release, Palantir AIP is the first major partner that will be using Microsoft's OpenAI large language model (LLM) in a classified environment.
Is Palantir stock a buy right now?
Right now, Palantir trades at a forward price-to-earnings (P/E) ratio of 90.6. Not only is that pricey even for a growth stock, but it's well above many of Palantir's software-as-a-service (SaaS) peers.
Clearly, investors are pricing in some strong growth for Palantir's future.
However, I would argue that much of this anticipated growth is rooted more in broad -- if not vague -- generalities surrounding the long-term outlook of the AI movement. In other words, I don't think Palantir's deal with Microsoft and the potential opportunities at stake are playing much of a role in Palantir's current price action.
It will be important for investors to uncover if Palantir's management sheds light on the Microsoft relationship should the company begin to generate more accelerated growth or potentially win larger public sector deals.
Although the strategic relationship with Microsoft is encouraging and a sign of validation for Palantir's capabilities, the partnership itself is not reason enough to buy the stock.
It's important to consider the longer-term implications that could result from the deal with Microsoft. I think Microsoft will ultimately be a new source of lead generation for Palantir. Cross-selling into Microsoft's existing government customer base could help Palantir smooth out its own public sector business. So, to me, the deal could very well be a game changer in the long run.
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Adam Spatacco 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 January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Is Palantir's Deal With Microsoft a Game Changer? was originally published by The Motley Fool