Is The Deal Between Nvidia and Palantir a Game Changer?

There's no denying that one of the biggest trends over the past several years has been the growing adoption of artificial intelligence (AI). Most experts view AI as the most important technological development since the dawn of the internet. Businesses and governments have only begun to scratch the surface of productivity improvements and are scrambling to deploy these next-generation systems to secure their share of the expected financial windfall.

To that end, AI chipmaker Nvidia (NASDAQ: NVDA) and AI systems pioneer Palantir (NASDAQ: PLTR) are expanding their existing partnership to build the foundation for sovereign AI within the U.S. government.

Image source: The Motley Fool.

Critical infrastructure

When it comes to AI, Nvidia and Palantir are arguably among the most important players in the field.

This week, Palantir announced a new open-source AI engine -- based on Nvidia's Nemotron models -- to deliver secure, sovereign AI to U.S. government agencies. The pair highlighted the importance of open-source software to the development of the internet, which resulted from a collaboration between the Defense Advanced Research Projects Agency (DARPA) and four top-ranked universities.

In that spirit, the pair will adapt these open-source models for use in air-gapped environments -- ultra-secure computer systems not connected to the internet -- allowing government users to reap the rewards of AI while maintaining control over sensitive data. These Nemotron models will serve as the foundation for custom frontier models to support the U.S. government and its agencies. Running these models on agency-specific data can yield more data-driven insights, boosting productivity.

A pairing of AI titans

Nvidia's state-of-the-art graphics processing units (GPUs) are the gold standard for AI, controlling between 85% and 92% of the data center GPU market, where most AI processing occurs. The company's secret weapon is CUDA, a library of software tools that helps developers harness the raw, number-crunching power of GPUs for computationally intensive applications -- giving Nvidia a vast competitive advantage.

For its part, Palantir pioneered the concept of ontology, or overlaying an AI-centric dashboard across company information systems, allowing management to make data-driven decisions based on company-centric information in real time. Ontology sits at the heart of Palantir's wildly successful Artificial Intelligence Platform (AIP), which is behind the company's blistering growth.

Earlier this year, the companies announced the availability of a Palantir AI OS Reference Architecture (AIOS-RA) -- a turnkey AI datacenter for governments to develop their own internal AI capabilities. The system combined the blazing speed of Nvidia's Blackwell Ultra platform, Blackwell GPUs, and Spectrum-X Ethernet, along with the company's CUDA library and Nemotron models. The systems were integrated with Palantir's Foundry, Apollo, and AIP systems.

An AI winning streak

Both Nvidia and Palantir have capitalized on the growing demand for AI.

In the first quarter, Palantir generated revenue of $1.63 billion, up 85% year over year, the company's highest-ever year-over-year growth rate and the 11th consecutive quarter of accelerating revenue growth. Its profitability was equally impressive, as adjusted earnings per share (EPS) of $0.33 surged 154%.

Perhaps more telling, Palantir's remaining performance obligation (RPO) -- commonly called backlog -- surged 134% year over year to $4.45 billion. Moreover, its net dollar retention rose to 150%. Put another way, current customers are spending 50% more than this time last year. This is clearly a stock that is going places.

For its fiscal 2027 first quarter (ended April 26), Nvidia generated record revenue that surged 85% year over year to $81.6 billion, which drove adjusted earnings per share (EPS) that soared 140% to $1.87, marking the 14th consecutive quarter of sequential revenue growth.

Nvidia CEO Jensen Huang has stated that the company has "visibility" to $1 trillion in revenue from the company's Blackwell and Vera Rubin chips over the next couple of years.

Is the deal a game changer?

There are clear advantages to partnerships of this magnitude. First, they capitalize on both companies' individual strengths to their mutual benefit. Additionally, each expands its total market opportunity to its partner's customer base. Palantir has its finger on the pulse of enterprise and government AI demand, and Nvidia supplies the bleeding-edge processors needed to accelerate AI solutions.

Palantir is selling for 131 times earnings, compared to Nvidia's more reasonable multiple of 30. However, the price-to-earnings ratio isn't ideal for valuing high-growth stocks. Using the more appropriate price/earnings-to-growth (PEG) ratio returns a multiple of 0.45 for Palantir and 0.27 for Nvidia, when any number less than 1 is the standard for an undervalued stock. So they're both attractively priced.

It's certain these companies stand to benefit from the collaboration, particularly since Palantir and Nvidia are both at the top of their game. However, I wouldn't say the deal rises to the level of "game changer." I would say that both Nvidia and Palantir are worth a look, especially at these prices.

Danny Vena, CPA has positions in Nvidia and Palantir Technologies. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.