One of the biggest themes fueling a sharp rebound in the market last year was artificial intelligence (AI). Applications such as ChatGPT have taken the world by storm, and megacap tech companies such as Microsoft, Alphabet, Amazon, and Nvidia are spending billions to gain an edge in the AI arena.
Other software players making inroads in the space are often overlooked in relation to their larger peers. Two such companies in the data analytics space are taking very different approaches to AI. Let's take a look at how Snowflake (SNOW 3.69%) and Palantir Technologies (PLTR 3.73%) are competing in AI, and assess which company looks like the winner.
Palantir is bringing the heat...
Palantir has long been considered a government contracting business given the company's close ties to the U.S. military and its Western allies. Although the company develops a host of software products, many Wall Street pundits remained skeptical of Palantir's tech chops. In fact, a short report published by The Bear Cave nine months ago went as far as labeling Palantir an "AI imposter."
But in 2023, Palantir caught the bears off guard thanks to the success of its fourth big product: the Palantir Artificial Intelligence Platform (AIP). Since AIP's commercial launch last April, Palantir has performed nearly 850 demo pilots for the new software platform. By comparison, the company did 92 pilots in 2022.
What's even more impressive is the rate at which these demos are converting to paid customers. Last year, Palantir grew its customer count by 35% year over year. However, customer growth from its non-government operation was the real winner -- increasing by 44%.
In addition to accelerating its top line, Palantir has been demonstrating disciplined financial operation all around. The company has reported profits on a generally accepted accounting principles (GAAP) basis in five consecutive quarters, and its balance sheet ended 2023 with $3.7 billion of cash and equivalents, and no debt.
I see the advent of AIP as a first step in Palantir's changing investors' perception of it from a government contractor to an actual software-as-a-service (SaaS) business.
Image source: Getty Images.
...and the snow is melting
Snowflake has almost a polar opposite narrative to that of Palantir. When it was still private, Snowflake attracted some of the world's most renowned venture capitalists. Moreover, the company's innovative data warehousing service helped fuel staggering revenue growth for years. Unsurprisingly, Snowflake completed the largest software initial public offering in history in 2020 -- and even saw participation from the likes of Warren Buffett.
Nevertheless, since hitting the public exchanges in late 2020, the growth narrative surrounding Snowflake has started to cool. The company's revenue growth has started to slow down significantly, and while some of this can be attributed to a challenging economy, there is more to the picture than decelerating sales.
One of the most important metrics for SaaS businesses is net revenue retention (NRR), which measures how much revenue is expanding net of any churn the company experiences. If the ratio is above 100%, that implies that the company is outselling its churn.
Indeed, Snowflake's recent NRR of 131% isn't anything to cry about. However, what's concerning is that the company's NRR has declined in eight consecutive quarters. With revenue growth slowing down, and retention concurrently in decline, it's no wonder that Snowflake is still hemorrhaging cash -- reporting a GAAP net loss of $836 million in 2023.
What's potentially the most concerning of all is Snowflake's lack of urgency surrounding AI. In mid-2023, the company acquired a start-up called Neeva, which specializes in generative AI applications geared toward cloud-based data sets. Since the acquisition, Snowflake has been pretty tight-lipped about its AI strategy. And with the company's CEO resigning on Feb. 28, it seems to me that Snowflake's future and its place in the AI landscape are enigmatic, at best. Frank Slootman will remain as chairman of the board at Snowflake and Senior Vice President of AI Sridhar Ramaswamy has taken over as CEO.
Valuation
The chart below shows the price-to-sales (P/S) ratios for a number of growth SaaS stocks. At a P/S around 28, Palantir is the highest-valued company in this cohort based on this metric. However, it's important to note that Palantir's valuation has expanded significantly since its blowout fourth-quarter earnings report last month. I think the company's premium valuation is warranted, and am bullish about the long-term potential of AIP.
SNOW PS Ratio data by YCharts
On the other hand, I do not see the recent decline in Snowflake's stock price as an opportunity to buy the dip. The company appears to be at a crossroads, and could very well be falling behind in the AI revolution.
With strong revenue growth, steady profits, accelerated customer acquisition, and a concrete AI vision, I see Palantir as the clear winner compared to Snowflake. A prudent strategy could be to use dollar-cost averaging to start building a position in Palantir, or add to an existing allocation.
