Despite already having a stellar year, shares of Palantir (NYSE: PLTR) rocketed higher after the company reported a blowout third quarter last week. After soaring and then crashing in the pandemic-driven software bubble, Palantir has re-emerged this year and soared to new all-time highs as an artificial intelligence (AI) darling.
On its recentearnings conference call Palantir made its case for being the biggest beneficiary of the AI boom -- perhaps even more than other big companies investors might think of first, such as Nvidia (NASDAQ: NVDA).
Stellar results
In the third quarter, Palantir delivered accelerating growth and margin expansion. Revenue grew 30%, nearly doubling the 17% growth rate the company achieved in Q3 of last year, while adjusted operating margins expanded from 29% to 38%. That acceleration is impressive for a large-cap company and speaks to Palantir's product catching on with customers ever since it launched its Artificial Intelligence Platform (AIP) back in 2023.
The U.S. region once again bolstered overall growth. And while U.S. commercial revenue surged 54%, mirroring the strong growth in that segment throughout 2024, even Palantir's larger and "slower" government segment accelerated to an impressive 40% growth rate.
It seemed unlikely that the government segment could eventually match the growth of the smaller, earlier-stage commercial business. But as last quarter showed, Palantir's newest innovations are taking hold, even in defense and government agencies, in the age of AI.
Will software win out in the end?
While the AI revolution appears to be taking off, investors are still pondering which stock is best positioned to benefit. Is it chipmakers such as Nvidia? Or is it the large language model (LLM) builders like OpenAI and other cloud computing giants?
On its conference call with analysts, Palantir management called out the LLMs as becoming increasingly "commoditized" while making the case for Palantir's value-added software platform as the true AI winner. Chief Technology Officer Shyam Sankar noted:
The LLMs are commoditized. But if you look at the models, you see that they're getting better, which is awesome. But they're also getting more similar across both closed and open-source models. While they're improving, they're converging upon each other, all while the price of inference is dropping precipitously. So, if you even look at these model companies, they have to build applications around these models to extract value. That's where we have a decade-long head start.
It would be surprising if LLMs were truly commoditized, as all the major cloud providers are drastically boosting their capital expenditures to achieve AI superiority. If these offerings truly did become commoditized, though, that would call into question whether the major clouds will get a sufficient return on that spending. And if the returns on LLM building are compressed, that might also put pricing pressure on Nvidia, whose margins have shot up to sky-high levels.
Sure, creating better models would, in theory, necessitate the purchasing of more Nvidia graphics processing units (GPUs). However, if returns are lower, it's possible that model builders may bargain harder or look to lower-cost competitors. While current competitors like Advanced Micro Devices and others have a low market share compared with Nvidia, all the major clouds are increasingly looking to make their own AI accelerators at a much lower cost.
The AI revolution is in its early days and could change a lot
Remember that in the dot-com revolution, it was the hardware and infrastructure providers that "boomed" first before crashing when the internet 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 that built large ecosystems on top of that commoditized infrastructure.
Now, the AI revolution might not follow the same pattern -- but it also might.
Of course, the AI revolution will remain extremely compute-intensive. For now, the AI semiconductor industry appears to remain supply-constrained, not demand-constrained. However, investors should definitely keep an eye on developments in the industry and look for clues that the dynamic may be changing.
Palantir is clearly one of the only real AI software winners today. However, should intelligent software applications eventually become the big AI beneficiaries, there could also be others.
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Billy Duberstein and/or his clients have positions in Apple. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
