Palantir Technologies (PLTR 2.39%) and Snowflake (SNOW 4.37%) are both secular growth plays on the cloud and AI markets. Palantir's cloud-based platform enables government agencies and large companies to gather data from disparate sources, and then analyze all of that data with its AI algorithms to make smarter decisions. Snowflake helps large organizations aggregate their data from a wide range of computing platforms. It then cleans up and stores all of that information in a centralized cloud-based data warehouse where it can be easily accessed by third-party data visualization and analytics apps.
Palantir and Snowflake both initially impressed a lot of investors, but they lost their luster over the past two years as their sales growth decelerated and rising rates compressed their valuations. As of this writing, Palantir and Snowflake trade 43% and 66%, respectively, below their all-time highs from 2021. Should you buy either of these out-of-favor stocks today?
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Both companies fell short of their initial expectations...
When Palantir went public in 2020, it told investors it could grow its revenue by at least 30% annually through 2025. Its revenue increased 41% in 2021, but only rose 24% in 2022 and 17% in 2023. It mainly blamed that disappointing slowdown on the uneven timing of its government contracts and macro headwinds for the commercial sector.
But for 2024, Palantir expects its revenue to rise 18% to 20% as its government business stabilizes and its booming U.S. commercial business continues to expand. Analysts expect its revenue to grow at a compound annual growth rate (CAGR) of 20% from 2023 to 2026. That stabilization is reassuring, but its stock isn't cheap at 18 times this year's sales.
Snowflake also went public in 2020. In 2022, it set an ambitious long-term growth target for generating $10 billion in annual product revenue (which account for most of its top line) by fiscal 2029 (which ends in January 2029).
It initially seemed like Snowflake could achieve that ambitious goal: Its product revenue surged 120% in fiscal 2021, 106% in fiscal 2022, and 70% in fiscal 2023. But in fiscal 2024, its product revenue only rose 38% -- and analysts expect its total revenue to increase just 24% to $3.5 billion in fiscal 2025.
To generate $10 billion in product revenue in fiscal 2029, Snowflake would need to grow at a CAGR of 30% over the next five fiscal years. Unfortunately, analysts expect its total revenue to increase at a CAGR of 24% from fiscal 2024 to fiscal 2027 -- so it could broadly miss that goal as it loses its status as a hypergrowth tech company. That slowdown is disappointing for a stock that still trades at 13 times this year's sales.
... But Palantir has clearer strengths than Snowflake
Both of these companies face similar macro challenges, but Palantir is a lot more profitable than Snowflake. Palantir turned profitable on a generally accepted accounting principles (GAAP) basis in 2023, and analysts expect its GAAP earnings per share (EPS) to soar 71% in 2024 and continue growing at a CAGR of 49% over the following two years. On a non-GAAP (adjusted) basis, analysts expect Palantir's EPS to rise 32% this year. That's a promising outlook, but its stock still isn't cheap at 67 times forward earnings.
Snowflake turned profitable on a non-GAAP basis in fiscal 2022, but it's nowhere close to breaking even on a GAAP basis yet. Analysts expect it to continue posting GAAP net losses of over $1 billion per year from fiscal 2024 through fiscal 2027.
That's worrisome because Snowflake faces stiff competition from Amazon Web Services (AWS), Microsoft's Azure, and Alphabet's Google Cloud -- which all integrate their own data warehouses into their cloud platforms. Snowflake doesn't own its own cloud infrastructure platform and hosts its data warehouses on AWS, Azure, and Google Cloud -- so it actually pays recurring fees to its top competitors.
The better buy: Palantir
I wouldn't rush to buy either of these stocks right now, since their valuations seem to have been inflated by the buying frenzy in AI-related stocks over the past year. But if I had to choose one over the other, I'd stick with Palantir because its growth rates are stabilizing, its profits are soaring, and it faces fewer direct competitors in its niche market.
