While artificial intelligence (AI) is a field that shows great promise, some AI stocks appear to have gotten overhyped lately relative to their business results. Palantir Technologies (PLTR 1.87%) is one of these companies. Its stock had a phenomenal 2023, soaring 167% in a year when Palantir's business results might be considered below average.
Instead, if I wanted to add an AI stock to my portfolio, I'd look to UiPath (PATH 5.63%) or CrowdStrike (CRWD 3.86%). Both offer superior growth yet come at a similar or cheaper price tag. Let's see why.
NASDAQ: PLTR
Key Data Points
Palantir's stock isn't in line with its results
Palantir's AI tools help its customers create custom AI models and dashboards that allow its users to make the most informed decisions possible.
While Palantir's software has been recognized as industry-leading (I'm not debating that), its current financial state doesn't make sense with its stock price. This brings up an important point: A company can be doing fantastically and succeeding at its mission, yet the stock can be so overvalued that it doesn't earn investors an acceptable return.
In the third quarter, Palantir grew its revenue by 17% year over year to $558 million and gave guidance for 18% growth in the fourth quarter. That's respectable growth but not fast enough to support its incredibly high valuation.
PLTR PS Ratio data by YCharts
With a price-to-sales (P/S) ratio of nearly 18, its valuation is nearly equal to its growth rate. While there's no hard and fast rule here, it's normally desirable to see a company's growth rate be at least double or triple its P/S ratio. This rule gets thrown out the window when a company becomes fully profitable and the price-to-earnings (P/E) ratio takes over, but it holds for less mature businesses.
Now, let's compare the value that UiPath and CrowdStrike shares offer.
NYSE: PATH
Key Data Points
UiPath and CrowdStrike are growing quicker
UiPath and CrowdStrike offer two different benefits over Palantir, with UiPath being cheaper than Palantir and CrowdStrike growing much faster than Palantir.
UiPath's robotic process automation (RPA) tools utilize AI to help its clients automate tedious tasks, making employees more efficient. This solution has proven highly effective and has spurred the company's rapid growth rate. In Q3 of fiscal 2024 (ended Oct. 31), UiPath's revenue rose 24% year over year to $326 million. It expects to duplicate that effort in Q4, with management guiding for revenue to rise 24%.
PATH PS Ratio data by YCharts
Despite its faster growth rate than Palantir, UiPath's stock trades at a lower valuation. Ten times sales is a much more reasonable valuation for a software company, and with UiPath's rapidly growing business, it makes for a no-brainer buy.
CrowdStrike is a leader in the cybersecurity space and offers top-notch protection powered by AI through machine learning (ML). CrowdStrike's growth is far quicker than the other two, boosting its revenue 35% to $786 million in Q3 of fiscal 2024 (ended Oct. 31). With guidance coming in at 32% growth for Q4, it looks set to continue its rapid growth.
NASDAQ: CRWD
Key Data Points
CrowdStrike's stock has received much attention over the past few months, which has caused the stock price and valuation to rise significantly.
CRWD PS Ratio data by YCharts
As a result, its valuation has reached nearly 25 times sales. While no one would argue that it's necessarily cheap, it is cheaper from a growth-to-valuation standpoint compared to Palantir.
With the massive tailwinds behind cybersecurity, I'm confident that CrowdStrike makes for a better buy than Palatnir, even with its elevated stock price.
