Days after reporting strong second-quarter results, Palantir Technologies (NYSE: PLTR) gave investors even more good news when it announced an expanded partnership with Microsoft (NASDAQ: MSFT). The goal is to sell analytics and artificial intelligence (AI) services to various defense and intelligence agencies within the federal government.
Palantir built its reputation on helping U.S. government intelligence agencies track and combat terrorism with its data collection and analytics platform, but government has become one of the company’s weak spots in recent years. Let’s take a look at how this deal could change that.
Seeking to boost federal government sales
The U.S. government has long been Palantir’s largest customer, though its growth has become a weak spot for the company. Total government revenue growth, including from foreign governments, slowed to 19% in 2022 and just 14% in 2023.
The country has seen something of a rebound this year, with total government revenue growing 23% year-on-year to $371 million in the second quarter, and U.S. government revenue growing 24% to $278 million.
However, that figure still lags behind the faster-growing commercial segment, which increased 33% year-over-year to $307 million in the quarter. U.S. commercial revenue, in particular, grew even faster, by 55% to $159 million.
The partnership with Microsoft aims to boost growth in its U.S. government segment. Palantir’s full suite of products will now be deployable using Microsoft’s government cloud, including Microsoft Azure Government, Azure Government Secret, and Azure Top Secret. The partnership will also leverage Azure’s OpenAI service and integrate its leading language models, including GPT-4, into Palantir’s Foundry software and Artificial Intelligence Platform (AIP).
One of the main goals of this partnership will be to accelerate deployments, particularly with AIP. In collaboration with Microsoft, the company will organize training camps to allow defense and intelligence actors to test the technology.
Palantir has had great success in acquiring new customers through its commercial sector trainings, and it plans to expand this approach to the federal sector as well. These workshops provide training and demonstrate how AIP can be applied to critical operations and other potential uses.
One downside to Palantir’s government business is that it can be a project-specific contract. If the company can start integrating AIP into more government workloads, it can help create a more sustainable and reliable recurring revenue stream. Providing AI services to various government defense and intelligence agencies is a huge opportunity for the company, and the partnership with Microsoft should make it easier to get approvals.
Is the stock a buy?
Palantir has proven the strength of its technology, but what makes many investors cautious is its valuation. The stock is trading at a…
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