Better Artificial Intelligence (AI) Stocks: Palantir vs. Nvidia

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Software company Palantir Technologies (NYSE: PLTR ) And the chip company Nvidia (NASDAQ: NVDA ) There are two of the hottest stocks on Wall Street. Both stocks have gained more than 240% over the past year and have strong investor loyalty.

Is one artificial intelligence (AI) stock better than another? To find out, I compared them head-to-head, why they’re making progress and whether they can keep up. It was a very close race, but one stood well ahead of the other.

Here’s what you need to know.

Meeting these two very different companies

Both stocks rose due to the stellar performance of their underlying businesses. However, these two AI companies are very different. Nvidia spent years specializing in high-performance GPUs, which became ideal for data centers and AI. Nvidia’s high-quality products and CUDA software, which helps users efficiently use the power of their GPUs, have given Nvidia an early hold on the AI ​​chip market — roughly 80% to 90% accordingly.

Palantir, on the other hand, builds custom software applications for both government and commercial applications. It runs three software platforms: Gotham, Foundry, and AIP for AI applications. You can think of Palantir as an operating system that helps organizations use their data. The company’s intention is that it enhances human intelligence. It doesn’t change it.

A closer look at each company’s growth

From a pure numbers perspective, Nvidia is leapfrogging faster than Palantir. You can see below how both companies started to accelerate revenue growth in mid-2023, but Nvidia got big data center spending from big technology customers, especially in the “Magnificent Seven.” . It’s fair to wonder how long this massive increase in data center spending from big tech will last.

One possibility is for these companies to start developing their own custom chips in-house, weaning themselves off Nvidia’s milk. That could hurt long-term growth for the company, which currently derives most of its revenue from a handful of customers.

NVDA Revenue (Quarterly YoY Growth) Chart

Speaking of Palantir, the company isn’t as explosive as Nvidia. But what impressed me was the growing customer base of the company. Palantir’s US customer base grew 55% year-over-year and 22% year-over-year in the fourth quarter. Quarter to quarter. Customers come in all shapes and sizes, so this is not an exact translation. Such customer growth bodes well for long-term revenue growth.

Nvidia’s customer concentration may not matter, and Nvidia’s chips will maintain their market share. Still, I’d like to see a customer expansion similar to Palantir.

What is the best bang for your buck?

Analysts expect significant revenue growth from both companies going forward. On a forward basis, this makes both stocks cheaper than you’d expect after your 200% run. I like to use the PEG ratio to compare how much I pay to a company’s earnings growth. The lower the PEG ratio, the better, and I’d like to spend less than 1.5 if I can.

Nvidia only fits this criteria with a PEG ratio of over 1. Palantir doesn’t quite fit, with its PEG ratio of 1.6.

NVDA PE Ratio (Forward) Chart

Based on each company’s expected long-term earnings growth, Nvidia is easily the better value today. Of course, the caveat is whether each company will live up to expectations.

The decision is…

Both companies are top AI stocks and leaders in their respective fields. Both are accelerating their revenue growth. Naturally, analysts are very optimistic about each company’s earnings growth going forward. Any company that you believe is likely to meet growth expectations over the next three to five years is probably your winner.

This idiot is giving Palantir a slight edge. Why?

Palantir gets about half of its revenue from government contracts. The company’s long history with the government may contribute little to Palantir’s business, and vice versa by expanding its customer base. Meanwhile, Nvidia’s customer focus could be difficult if a key customer chooses another chip.

While the numbers say Nvidia is the better buy, one argument is that investors may be a bit overconfident in Palantir’s long-term growth, especially when looking at the long term.

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Justin Pope has no positions in any stocks. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a Disclosure Policy.

The Better Artificial Intelligence (AI) Stock: Palantir vs. Nvidia was originally published by The Motley Fool.

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