Palantir Technologies shares surged nearly 9% in early trading on Tuesday, after the company lifted its annual revenue forecast for the second time this year, banking on strong demand for its AI-related services from governments and companies.

Investors have been betting big on the data analytics and defense software company’s military-grade artificial intelligence tools and services, with Palantir being one of the biggest beneficiaries from increased U.S. defense spending.

That has helped double the company’s stock price this year, making it the best performer on the S&P 500 index through last close. The stock has surged more than 600% in the last three years.

“Palantir isn’t just a government vendor anymore – it’s becoming an indispensable partner for enterprises in the AI revolution,” said Jacob Falkencrone, Saxo’s global head of investment strategy.

Wedbush analysts expect the company to hit trillion dollars in market capitalization in the next few years, fueled by the AI boom. Its market cap was $379.14 billion as of the stock’s last close.

Co-founded by Peter Thiel in 2003 and listed in 2020, Palantir has won a slew of U.S. government contracts this year – including a $30 million contract from Immigration and Customs Enforcement in April.

The Trump administration has been bolstering its focus on national security. Last week, the U.S. Army said it might spend up to $10 billion on Palantir’s services over the next decade.

“Palantir’s staggering growth is showing no signs of slowing … and (its) ability to grow at scale has been underestimated by a large cohort of the market,” said Matt Britzman, senior equity analyst at Hargreaves Lansdown.

Sales to the U.S. government jumped 53% to $426 million, representing more than 42% of the total second-quarter revenue of about $1 billion.

Valuation Concerns

Some analysts have expressed concerns about the company’s lofty valuations.

The stock trades at over 200 times its 12-month forward earnings estimates, making it the most overvalued on the S&P 500 index, compared with AI giant Nvidia’s 34.81.

“Despite the company having robust competitive advantages…we believe this is turning into a difficult-to-justify valuation story,” Morningstar analysts said.

Palantir also expects expenses to rise significantly in the third quarter due to seasonal hiring, at a time when big tech firms are rushing to poach top AI talent.

At least eleven brokerages raised their price targets on the stock after the company’s results.

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(Reporting by Siddarth S and Akriti Shah in Bengaluru; additional reporting by Medha Singh; Editing by Shilpi Majumdar, Anil D’Silva and Devika Syamnath)