Perhaps the most significant secular tailwind to emerge since the beginning of last year is the rapid adoption of artificial intelligence (AI). This is driving an ongoing paradigm shift in business as companies try to figure out how to best leverage these next-generation algorithms.
What sets generative AI apart from its predecessors is its versatility. These AI systems can be used to generate images, create stories, summarize data, and create presentations, all with a few simple prompts. What’s more, the ability to find patterns in data and streamline routine and time-consuming tasks is being touted as the “fourth industrial revolution” and could dramatically change the way business is done. Business leaders everywhere are working to secure their share of the potential windfall.
Now, enterprise software and cloud giant Microsoft (NASDAQ: MSFT) and AI and data analytics pioneer Palantir Technologies (NYSE: PLTR) have joined forces to develop advanced AI solutions for the US government.
A dynamic duo
In a press release Thursday, Palantir and Microsoft announced an expansion of their existing partnership to “deliver some of the most advanced and secure cloud, AI, and analytics capabilities to U.S. defense and intelligence agencies.”
The goal of the collaboration is to create a “unique, integrated technology suite” with Microsoft’s Azure Cloud and OpenAI services and Palantir’s Artificial Intelligence Platform (AIP) in the government’s secure cloud.
By joining forces, Palantir will deploy Gotham, Foundry, Apollo, and AIP on Microsoft’s Azure Government, Government Secret, and Top Secret Cloud platforms. Palantir will also adopt Azure’s OpenAI service in these secure cloud environments.
The resulting integrated solution enables government users to build AI systems for a variety of applications, such as logistics, contracting, prioritization, action planning, and more.
What sets this deal apart is the addition of Palantir’s AIP. Management found that many users were hesitant to take the AI leap because they simply didn’t know where to start. The company began hosting bootcamps, or sessions where users were paired with Palantir engineers to create these systems to solve real-world problems.
The program has proven to be hugely successful, with many customers signing significant contracts within days or weeks of attending a bootcamp session. The strategy could work just as well for government users.
A win-win situation
Both Palantir and Microsoft have made names for themselves in the rapidly growing field of AI.
The success of Palantir’s aforementioned strategy is evident in its recent results. In the second quarter, revenue of $678 million grew 27% year over year, and Palantir posted its seventh consecutive quarter of profits — but there was much more going on under the hood.
The company’s government revenue, which tends to be erratic, grew 23% year-over-year, while commercial revenue grew 33%. This was fueled by the U.S. commercial segment, which has become Palantir’s fastest-growing business, with revenues up 83% year-over-year and now expected to grow at least 47% through 2024.
The engine behind that growth is AIP. Palantir recently announced that it has run bootcamps for more than 1,025 organizations in the past year, far exceeding its original plan of 500. The results are astonishing, with Palantir providing multiple examples of seven-figure deals being signed within days or weeks of completing the bootcamp, illustrating just how successful this new strategy has been.
Microsoft, for its part, was quick to embrace generative AI, developing Copilot, a suite of AI-powered assistants designed to simplify and streamline time-consuming administrative tasks. In the fourth quarter of its fiscal 2024 (ending June 30), Microsoft said the number of people using Copilot at work more than doubled quarter over quarter. That helped fuel robust growth, as revenue of $64.7 billion grew 15% year over year, while earnings per share (EPS) of $2.95 grew 10%.
Microsoft’s biggest growth driver was its intelligent cloud segment, which grew 19% year over year and now represents 44% of total revenue. At the heart of the segment is Azure Cloud, which grew 29%. The company also noted that eight points of that growth came from AI services. Microsoft also said that demand continued to “outpace our available capacity.” It’s worth noting that Microsoft’s cloud growth continues to outpace that of its rivals, with AI getting much of the credit.
This illustrates that Palantir and Microsoft are both benefiting from the enormous potential of generative AI, even as their competitors lag behind.
Is the deal a game-changer?
One of the most intriguing prospects of this partnership is the complementary capabilities of these two AI superstars and the wide range of use cases the collaboration will enable. Microsoft’s government-approved secure cloud will house Palantir’s decades of AI expertise and its advanced AIP. Additionally, Palantir’s bootcamp strategy could attract users and use cases that might otherwise have been overlooked.
Given their growth prospects and the opportunity to benefit from AI, these stocks all represent attractive opportunities.
Microsoft currently sells for 30 times expected earnings, just a small premium over the 28 multiple for the S&P 500.
At 82 times forward earnings, Palantir may seem prohibitively expensive, but that statistic doesn’t take into account the company’s accelerating growth. Using the forward price-to-earnings-growth ratio (PEG) gives a more accurate picture, showing a multiple of 0.3 — where a number less than 1 indicates an undervalued stock.
This deal benefits both partners across the spectrum of their AI offerings. Microsoft can leverage Palantir’s existing AI partnerships with U.S. government agencies, while Palantir benefits from the expansion of those existing revenue streams, as well as the accelerated adoption of AIP within the defense and intelligence communities. As such, this deal is could be will actually be a game-changer, but only time will tell.
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Danny Vena 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 Technologies and Microsoft’s Deal a Game-Changer? was originally published by The Motley Fool
