Palantir shares rocket 25% after revenue beat, strong demand for AI

Shares of Palantir popped more than 25% Tuesday, a day after the company released fourth-quarter earnings that surpassed analysts' expectations for revenue and showed strong demand for its artificial intelligence offerings.

Palantir, known for its defense and intelligence work with the U.S. government, reported that revenue in the quarter increased 20% to $608.4 million, up from the $602.4 million expected by Wall Street. Palantir said it expects to report between $612 million and $616 million in revenue during its first quarter, shy of the $617 million analysts were anticipating.

In a letter to shareholders, CEO Alex Karp said demand for large language models in the U.S. "continues to be unrelenting." Palantir has been scaling its Artificial Intelligence Platform, or AIP, and Karp said the company carried out nearly 600 pilots with the technology last year.

Analysts at Citi upgraded Palantir shares to neutral from sell and raised their target price from $10 to $20. They said Palantir delivered a "stronger-than-expected" fourth quarter driven by "breakthrough momentum" in the company's commercial unit, but they still have some reservations about its conservative full-year guidance for its non-U.S. commercial sectors.

"We see these risks balanced by potential call options on new AI Monetization (AIP) and improving U.S. Government contracts into 2024," the analysts wrote in a note Tuesday.

Jefferies analysts also upgraded the stock and said Palantir delivered an "impressive" quarter led in part by its commercial growth in the U.S.

Jefferies analysts said they had downgraded shares of Palantir at the beginning of the year because they believed it would take time for its AI platform to have a real impact, but now, they think the company is at an "inflection point."

"We are impressed with AI Platform (AIP) ramping faster than our initial expectations and believe it's appropriate to upgrade shares to reflect the momentum," the analysts wrote in a Tuesday note. "We were wrong, but we're not stubborn."

However, the Jefferies analysts said they still have some concerns about Palantir's valuation since shares are trading at a "23% premium to the large cap average," so the analysts will "remain on the sidelines."

Bank of America analysts reiterated their buy rating on the stock and said that while AIP is still in its early days, it is already impacting the company in a "meaningful way." The analysts said they expect Palantir's momentum with AI to continue, and they also see "significant opportunities" for the company's software within the U.S. government.

"We think this remarkable growth is a sign of Palantir's unique position as an enabler of AI-powered data-driven decision-making in a tangible, accessible, and operational way," the analysts wrote Tuesday.

CNBC's Michael Bloom contributed to this report.