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In the rapidly evolving landscape of artificial intelligence (AI) investments for 2024, Palantir (PLTR -11.49%) and Nvidia (NVDA -7.03%) have emerged as two prominent stocks. However, after enjoying significant gains last year, both companies are currently experiencing a downturn, with their stock prices considerably lower than their recent highs.
In this article, we will analyze which of these two stocks may present the more appealing investment opportunity at this moment.
Leading the AI Charge
While Palantir and Nvidia occupy different sectors, they have both established themselves as key players in the AI domain.
Nvidia is primarily recognized as a semiconductor powerhouse specializing in the production of graphic processing units (GPUs). These chips are critical to AI infrastructure due to their rapid processing capabilities, which make them ideal for training AI models and performing inference tasks. Since the inception of its CUDA software platform in 2006, Nvidia has expanded its offerings to include advanced libraries and services tailored for AI, thereby increasing the attractiveness of its chips.
Conversely, Palantir operates in the software analytics arena. Initially, the company gained traction within government sectors, utilizing its data analytics tools for high-stakes tasks like counter-terrorism efforts. Recently, however, it has transitioned towards becoming an AI operating system provider, delivering solutions that aid customers in the development and deployment of AI applications across multiple industries.
Growth has been substantial for both companies. Nvidia has seen its revenue more than double over the past two years, spurred by a surge in investments from major tech firms and AI startups racing to enhance their AI capabilities. The three leading cloud computing companies are at the forefront of this spending, collectively planning to invest an astounding $250 billion on AI infrastructure in the coming year. Nvidia projects that capital expenditures related to its data center business will exceed $1 trillion by 2028.
Similarly, Palantir has reported impressive growth figures, particularly in its commercial sector. The company’s revenue increased by 36% in the last quarter alone, with U.S. commercial revenue skyrocketing by 64% and U.S. government revenue rising by 45%. The customer base expanded by 43%, largely driven by initiatives like its AI bootcamps aimed at engaging new commercial clients.
Many of these commercial clients are still in the proof-of-concept stage, which positions Palantir for potential future growth as they transition to full-scale application of AI solutions aimed at addressing practical challenges.
Evaluating the Risks
Both companies face their own sets of risks. For Nvidia, a major concern is the possibility of a slowdown in AI infrastructure investments. Since the CUDA platform is free, Nvidia relies heavily on the sale of chips to sustain growth, creating vulnerability in a fluctuating market.
Despite ongoing increases in AI spending, there are reports that Microsoft, Nvidia’s largest customer, has scaled back on some data center initiatives due to fears of potential oversupply. Thankfully, analysts at TD Cowen have pointed out that competitors like Alphabet and Amazon are stepping up to fill the gaps left by such reductions.
The race to enhance AI models is likely to sustain demand for Nvidia’s GPU technology, especially as newer models require significantly more processing power during training phases. For context, recent developments from Meta Platforms and xAI have demanded approximately ten times the number of GPUs compared to their predecessors.
On the other hand, Palantir is encountering risks tied to potential budgetary constraints from the U.S. government, its largest customer, which constituted over 40% of its revenue last year. Given the current push from the Department of Defense (DOD) for budget reductions—targeted at an annual 8% decrease over five years—there could be implications for Palantir’s growth trajectory. Despite this, CEO Alex Karp has expressed optimism about the company’s adaptability amid these changes, although insider stock sales may raise questions about confidence levels within the company.
Comparing Valuations
One notable divergence between Nvidia and Palantir lies in their valuation metrics. Presently, Nvidia’s stock is considered relatively affordable, trading at a forward price-to-earnings (P/E) ratio of approximately 24, with a price/earnings-to-growth (PEG) ratio exceeding 0.4. Typically, a PEG ratio below 1 indicates undervaluation, positioning Nvidia as an attractive option by this standard.
In contrast, Palantir’s stock is viewed as expensive, trading at a forward price-to-sales (P/S) multiple of 53. This figure is more than double the peak multiples typically associated with similar high-growth software-as-a-service (SaaS) companies in 2021. Importantly, this comparison highlights a significant difference in the basis of valuation—earnings for Nvidia and revenue for Palantir.
While software companies generally warrant higher valuations than semiconductor firms due to their recurring revenue models, the stark contrast in valuation between these two companies is noteworthy. Both have unique growth opportunities and challenges ahead. Overall, in the current environment, Nvidia appears to be the more favorable investment choice, largely due to its stronger valuation amidst the growing demand for AI infrastructure.
Source
www.fool.com