Palantir Technologies (PLTR 3.73%) and Super Micro Computer (SMCI 8.89%) represent two different ways to invest in the expansion of the artificial intelligence (AI) market. Palantir's data mining platform aggregates and analyzes data from disparate sources to help organizations make more informed decisions. Super Micro Computer, which does business as Supermicro, produces pre-built servers for AI and machine learning applications.
Palantir gained a lot of attention because its Gotham platform is the default OS for data for the U.S. military and other government agencies. Its technology was reportedly used to track down Osama Bin Laden and controversially tapped by Immigration and Customs Enforcement (ICE) to locate and deport undocumented immigrants. Supermicro impressed the market with a tight partnership with Nvidia to produce a broad range of pre-built AI servers.
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Over the past 12 months, Palantir's stock price has rallied nearly 90%, while Supermicro's stock surged more than 375%. Let's see why the latter outperformed the former -- and if it will remain the superior AI play for growth-oriented investors.
Palantir faces near-term macro headwinds
Palantir's stock soared over the past year but remains nearly 60% below its all-time high of $39 a share, which it reached on Jan. 27, 2021. It lost its luster as its revenue growth cooled off and rising interest rates popped its bubbly valuation.
Palantir's revenue grew 47% in 2020 and another 41% in 2021 but only rose 24% in 2022. It expects just 16% revenue growth in 2023. That's well below its original goal of growing annual revenue by at least 30% through 2025.
Palantir blamed that slowdown on the uneven timing of its government contracts and the macro headwinds for its commercial Foundry platform. However, it expects its rollout of new features -- including an AI Platform for building AI apps and analyzing large language models -- to eventually stabilize its long-term growth.
Until that happens, Palantir is aggressively cutting costs to expand its adjusted operating margins, which rose from 17% in 2020 to 22% in 2022. It's also stayed profitable on a generally accepted accounting principles (GAAP) basis over the past three quarters and plans to stay in the black for the foreseeable future. Its adjusted free cash flow (FCF) also turned positive in 2022, and Palantir recently gave the green light to a $1 billion buyback plan.
Those bottom-line improvements will reinforce stability, but the company's stock still isn't a bargain at 60x forward earnings and 14x this year's sales. Those premium valuations suggest there's still a lot of AI hype baked into its volatile stock price.
Supermicro continues to ride Nvidia's coattails
Supermicro's revenue rose at a steady compound annual growth rate (CAGR) of 10% from fiscal 2016 and fiscal 2021 (which ended in June 2021). It didn't gain much attention from the bulls since it mainly did business in a commoditized market.
However, Supermicro's revenue suddenly soared 46% in fiscal 2022 and 37% in fiscal 2023, while adjusted net income more than doubled in both years. This growth was driven by its aforementioned partnership with Nvidia, which put its top-tier data center GPUs into Supermicro's pre-built servers right as the AI market exploded.
Supermicro expects the AI boom to boost its revenue by another 33%-37% in fiscal 2024. Analysts expect its adjusted earnings per share (EPS) to grow 42%. Northland Capital Markets recently estimated that Supermicro more than doubled its share of AI server market sequentially from 7% in its fiscal third quarter to 17% in its fiscal fourth quarter at the expense of Dell Technologies, Hewlett Packard Enterprise, and other legacy leaders of the pre-built server market.
Supermicro's growth rates are astounding, yet its stock retreated nearly 20% from its record highs over the past two months and looks surprisingly cheap at 17x forward earnings and 1.5x this year's sales. It seems the market is still pricing Supermicro as a legacy server maker instead of a high-growth AI stock -- and that gap might represent a good buying opportunity if it gets revalued as the latter.
The obvious winner: Supermicro
Palantir seems overvalued, relative to its growth prospects, while Supermicro seems undervalued. Investors are still bidding up Palantir's stock in anticipation of some AI upgrades, yet they're undervaluing Supermicro's growth potential in the same market.
Supermicro's stock has skyrocketed over the past year, but I don't think it's caught up to its most recent growth rates yet. Therefore, I believe it's clearly a better buy than Palantir right now.
