Palantir Technologies (PLTR) saw its shares decline 3% on Wednesday, as investors rotated out of software stocks and back into semiconductor and networking companies. The shift followed a fresh round of strong earnings from AI infrastructure players, which reinforced confidence in continued spending on artificial intelligence hardware.
The software sector broadly underperformed, with Microsoft, Salesforce, ServiceNow, and Workday all trading lower. Meanwhile, chipmakers and optical networking firms rallied on signs that demand for AI infrastructure remains robust. This pattern has become familiar in recent months, as investors alternate between AI hardware and software names depending on where they see the strongest near-term opportunities.
Software lags as AI infrastructure takes the spotlight
The latest rotation was triggered by earnings reports from chip and networking companies that signaled sustained strength in AI-related demand. Chips remain essential for powering large language models, while rapid data center expansion has boosted demand for optical networking equipment. At the same time, investors remain cautious about software companies, partly due to concerns that advances in AI coding tools could disrupt existing software products.
Despite Wednesday's decline, Palantir and Microsoft have significantly outperformed over the past three months, with Palantir shares gaining roughly 35%.
Record quarter, but valuation debate persists
Palantir recently reported one of the strongest quarters in its history, with revenue growing 93% year over year—the fastest pace the company has ever recorded. The results initially pushed the stock more than 20% higher. However, analysts remain divided on the stock's prospects.
Jefferies maintained its Underperform rating while raising its price target to $80 from $70. Analyst Brent Thill noted, "We are fundamental fans of PLTR, but valuation leaves little room for a normalization in growth or execution slippage." RBC Capital Markets also kept an Underperform rating with a $90 price target, citing slowing international revenue growth despite stronger-than-expected commercial and government results.
Morgan Stanley's Sanjit Singh highlighted Palantir's sustained execution, noting the company has accelerated revenue growth every quarter for the past three years while expanding operating margins from 25% to 60%. Hargreaves Lansdown analyst Matt Britzman described the latest quarter as evidence that the company is in a genuine expansion phase, while also acknowledging that the valuation remains elevated.
Strong operating metrics support higher guidance
Palantir's US business accounted for more than 81% of total revenue during the quarter and expanded 115% year over year. US commercial revenue grew 149%, while US government revenue increased 90%. The company closed a record 220 deals worth at least $1 million and generated $1.22 billion in adjusted free cash flow, representing a 63% margin. Net dollar retention reached 157%, indicating existing customers increased spending by 57% over the past year.
Following the strong results, Palantir raised its full-year revenue guidance to a midpoint of $8.154 billion, representing annual growth of approximately 82% and marking the company's largest-ever increase to full-year guidance. Despite the strong operating performance, valuation remains the central debate surrounding the stock. According to Barchart data, 21 of the 29 analysts covering Palantir rate the stock a Strong Buy, while six recommend Hold, one recommends Moderate Sell, and one recommends Strong Sell.
For investors tracking the broader AI trade, the rotation between hardware and software names is likely to continue. Recent rallies in AI chip stocks and optical networking players highlight the market's appetite for infrastructure plays, while software names like Palantir face valuation scrutiny despite strong fundamentals.
This article is for informational purposes only and does not constitute financial advice.
