Days after announcing strong second quarter results, Palantir Technologies (NYSE:PLTR) gave investors even more good news when it announced an expanded partnership with Microsoft (NASDAQ:MSFT)The aim is to sell analysis and artificial intelligence (AI) services to various defense and intelligence agencies of the federal government.

Palantir has built its reputation on helping U.S. intelligence agencies track and combat terrorism with its data collection and analytics platform. But in recent years, the government has become one of the company’s weakest points. Let’s look at how this deal could change that.

Boosting the federal government’s revenue

The U.S. government has long been Palantir’s largest customer, although its growth has become a weak point for the company. Growth in total government revenue, including foreign governments, slowed to 19% in 2022 and just 14% in 2023.

This year, there was a slight recovery: total government revenues rose 23% year-on-year to $371 million in the second quarter, while the U.S. government even grew 24% to $278 million.

However, the segment lagged behind the faster-growing commercial segment, which grew 33% year-over-year to $307 million in the quarter. In the U.S. in particular, commercial revenue grew even faster, up 55% to $159 million.

This partnership with Microsoft is expected to fuel growth in the US government segment. Palantir’s entire product suite can now be deployed through Microsoft’s Government Cloud, including Microsoft Azure Government, Azure Government Secret, and Azure Top Secret Cloud. The partnership will also leverage Azure’s OpenAI service and integrate its large language models, including GPT-4, into Palantir’s Foundry software and its Artificial Intelligence Platform (AIP).

One of the big goals of the partnership will be to accelerate deployment, especially with AIP. In collaboration with Microsoft, the company will host boot camps so the defense and intelligence community can test the technology.

Palantir has had great success in attracting new customers with its bootcamps in the commercial sector and will look to expand this to the government sector as well. These workshops will provide training and demonstrate how AIP can be applied to mission-critical operations and other potential applications.

One downside to Palantir’s government business is that it can be contract work for specific projects. If the company can start integrating AIP into more government workloads, it can help create a longer-lasting, more reliable revenue stream. Providing AI services to various government defense and intelligence agencies is a big opportunity for the company, and the partnership with Microsoft should make it easier to get approvals.

Image source: Getty Images.

Is the stock a buy?

Palantir has demonstrated the strength of its technology, but what makes many investors cautious is its valuation. The stock trades at a price-to-sales (P/S) ratio of around 20 based on analyst estimates for 2025.

PLTR PS ratio (Forward 1 year); data from YCharts.

That’s a pretty high multiple for a company whose revenue is growing at less than 30%. To justify that, it would have to grow value beyond 30%. Palantir has started to see a recovery in its U.S. government business, and this new partnership could boost that even further. But based on the current valuation, the market already seems to be pricing that into the stock.

I think Palantir is a good opportunity for the long term, but given its valuation, I would prefer to buy on a dip. Even the best technology companies experience periods where their share prices fall, and I would prefer to be patient and not chase shares at these valuations.

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Geoffrey Seiler does not own any of the stocks mentioned. The Motley Fool holds 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.