Despite already having a great year, the shares of Palantir (NYSE:PLTR) skyrocketed after the company reported a third-quarter hit last week. After taking off and then crashing into the pandemic-induced software bubble, Palantir has reemerged this year and soared to new all-time highs as a darling of artificial intelligence (AI).
During its recent earnings conference call, Palantir made the case for being the biggest beneficiary of the AI boom – perhaps even more so than other big companies that investors might initially think of, such as Nvidia (NASDAQ: NVDA).
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In the third quarter, Palantir achieved accelerating growth and margin expansion. Revenue grew 30%, nearly doubling the 17% growth rate the company achieved in the third quarter of last year, while adjusted operating margins rose from 29% to 38%. That acceleration is impressive for a large-cap company and proves that Palantir’s product has been resonating with customers since it launched its Artificial Intelligence Platform (AIP) in 2023.
The Americas region again supported overall growth. And while US commercial revenues rose 54%, reflecting strong growth in that segment through 2024, even Palantir’s larger and ‘slower’ government segment accelerated to an impressive 40% growth rate.
It seemed unlikely that the government segment would ultimately be able to match the growth of the smaller commercial activities at an earlier stage. But as the past quarter showed, Palantir’s latest innovations are taking hold, even in defense and government agencies, in the age of AI.
While the AI revolution appears to be taking off, investors are still wondering which stocks stand to benefit the most. Are they chipmakers like Nvidia? Or is it the big language modelers (LLM) like OpenAI and other cloud computing giants?
On a conference call with analysts, Palantir management called LLMs increasingly “commoditized” while making the case for Palantir’s value-added software platform as the real AI winner. Chief Technology Officer Shyam Sankar commented:
The LLMs have been commoditized. But when you look at the models, you see that they are getting better and better, and that’s great. But they are also becoming more and more similar in both closed and open source models. As they improve, they converge toward each other, while the price of inference drops dramatically. So if you even look at these model companies, they have to build applications around these models to get value out of them. That’s where we have a ten-year head start.
It would be surprising if LLMs were to become truly commoditized, as all major cloud providers are dramatically increasing their capital expenditures to achieve AI superiority. If this offering were truly commoditized, it would raise the question of whether the big clouds will get a sufficient return on that expenditure. And if LLM build yields are compressed, that could also put pricing pressure on Nvidia, whose margins have soared to sky-high levels.
Sure, creating better models would theoretically necessitate the purchase of more graphics processing units (GPUs) from Nvidia. However, if returns are lower, modelers may negotiate harder or look to cheaper competitors. While current competitors like that Advanced micro devices and others have low market share compared to Nvidia, all major clouds are increasingly trying to make their own AI accelerators at much lower costs.
Remember, during the dotcom revolution, it was the hardware and infrastructure providers that first ‘boomed’ before crashing when the dotcom bubble burst. In the aftermath, many of the biggest winners of the Internet age were large software companies like today’s “Magnificent Seven” or hardware-software integrators like Apple who built large ecosystems on top of that commoditized infrastructure.
Now, the AI revolution may not follow the same pattern, but it could.
Of course, the AI revolution will remain extremely computationally intensive. For now, it appears that the AI semiconductor industry remains limited by supply, not demand. However, investors should certainly keep an eye on developments in the sector and look for indications that the dynamics may be changing.
Palantir is clearly one of the few real winners in AI software today. However, if intelligent software applications end up being the big beneficiaries of AI, there could be others as well.
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Billy Duberstein and/or his clients hold positions at Apple. The Motley Fool holds positions in and recommends Advanced Micro Devices, Apple, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.
Is Palantir a better artificial intelligence (AI) stock than Nvidia? Why management thinks this is so. was originally published by The Motley Fool
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