Is Palantir Still a Buy After Its 33% Rally Over the Past Month?

Palantir Technologies (NASDAQ: PLTR) rebounded nicely after posting strong earnings. Its 33% gain over the past month puts it just into the green compared to a year ago. Although the artificial intelligence (AI) company is growing at a tremendous rate, valuations remain a core question in the bullish thesis.

Here's what investors should consider before entering the growth stock at current levels.

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AI sovereignty demand is heating up

Nations do not want to rely on other nations for their AI tools. They want full control over their resources, and Palantir is at the center of this objective. Palantir CEO and co-founder Alex Karp told investors that AI sovereignty demand "has now been unleashed" and has made the company feel "very optimistic about the future."

Grand View Research projects a 20.5% CAGR for the sovereign AI market through 2033. However, the company outpaces that growth rate by a wide margin. For instance, the U.S. government is Palantir's largest customer. Palantir earned $809 million from the government in Q2, which was a 90% year-over-year improvement. It also represented 18% sequential growth and came to more than 40% of total revenue.

As the U.S. government invests more heavily in AI, sovereign intelligence will become more valuable. Other countries are following suit, with Palantir as the highly touted option for this technology. Since the government accounts for a large portion of Palantir's total business, continued investments in sovereign AI provide a meaningful tailwind for Palantir's long-term fundamentals.

The commercial segment is growing even faster than government revenue

Although the U.S. government is still Palantir's largest customer, its commercial segment is growing much faster. U.S. commercial revenue surged by 149% year over year and made up $764 million of total sales. The gap between U.S. commercial and government revenue is narrowing as more businesses embrace AI.

A 28% sequential growth rate indicates that momentum is continuing and translating into higher profits. Palantir's net income more than tripled year over year to reach $1.1 billion, resulting in a net profit margin above 50%. Guidance implies that revenue growth will continue. The midpoint of guidance is set at $2.162 billion, representing a 12% quarter-over-quarter increase.

That's just realized revenue. Palantir has been closing record deals left and right that offer multiyear revenue visibility. For instance, the company closed a record-setting $2.13 billion of U.S. commercial deals. Not all of that revenue was realized this quarter, but it will show up in future quarters.

Although Palantir trades at a high valuation, its status as a linchpin in AI for governments and enterprises can help it maintain current levels. The company is growing rapidly, and if you can keep a five- to 10-year horizon, it looks like a good deal.

Marc Guberti has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.