When it comes to stocks riding the wave of excitement around artificial intelligence (AI) technologies, perhaps no other stock has done it better than Nvidia (NVDA +5.93%). As the dominant AI chip design company, its semiconductors are in high demand as organizations scramble to buy chips to support their AI needs. Palantir (PLTR 1.66%) is another tech stock riding the AI wave, offering a product that has delivered eye-popping productivity gains with AI's help.
Over the past year, both stocks have done extremely well, with Nvidia reporting 209% gains while Palantir rose nearly 79%. But investing is more about picking stocks based on the promise of future performance. Can both of these stocks keep riding the AI wave? If so, which has the better chance of staying up on the board longer? Let's take a closer look.
Nvidia stock has become expensive to own
Nvidia has undoubtedly experienced a wild ride thanks to AI. Investors primarily knew it as a graphics and gaming company until the early part of the decade. As recently as fiscal 2022 (ended in January 2022), the company's largest source of revenue was gaming. But even at that time, the company's data center segment had become increasingly important as data centers became a fast-growing market for its GPUs. Additionally, it had begun developing chips specifically for AI purposes.
When it became known that Nvidia's AI chips powered ChatGPT, the company's revenue shot massively higher. Thanks to the unprecedented demand for AI chips, the data center segment now accounts for 87% of the company's revenue. Consequently, in the first quarter of fiscal 2025 (ended April 28), revenue of $26 billion rose 262% versus year-ago levels. That increase led to a net income of over $15 billion, a yearly gain of 462%!
Additionally, consensus analyst estimates forecast fiscal 2025 revenue will rise by 98% before slowing to about 34% in fiscal 2026.
NASDAQ: NVDA
Key Data Points
At such growth rates, the 74 P/E ratio might not deter investors. However, that may lead to investors overlooking the price-to-sales (P/S) ratio of 39 and the price-to-book-value ratio of 63. By comparison, competitor Advanced Micro Devices has a P/S ratio of 12 and a P/BV ratio of 5, an indication of how expensive Nvidia stock has become in comparison to its peers.
Why investors might consider Palantir
Given the elevated cost of Nvidia stock, the AI growth story of Palantir may appear more compelling to some investors. Palantir offers data products that yield analytical insights for clients. Its technology has long relied on AI and machine learning. The stock became more appealing to investors when it expanded from national defense-based analysis to developing a product that applied these insights to the commercial sector.
Still, the game changer for the company came with the introduction of a generative AI platform called the artificial intelligence platform (AIP). It introduced this service using its AIP boot camps, and prospective customers reported considerable productivity gains after attending. For example, one (now) client claimed to accomplish more in one day than a hyperscaler had in four months!
Because the service is relatively new, investors may have time to get in before a possible buying spree in the stock. In the first quarter of 2024, revenue grew 21% yearly to $634 million. That led to $106 million in net income for Q1 versus just $17 million in the year-ago quarter.
Despite the productivity gains, Palantir does not appear to be on track for Nvidia-like growth. Analysts predict revenue will grow 21% in 2024 and at the same rate in 2025.
NASDAQ: PLTR
Key Data Points
Moreover, the valuation metrics offer a mixed picture for Palantir. On account of its recent profitability, the stock sells at 227 times earnings. Its P/S ratio of 27 is not far behind Nvidia's, though the price-to-book-value ratio of 16 strongly indicates that Palantir is the less expensive stock.
Nvidia or Palantir?
As the metrics stand now, Nvidia remains the more lucrative AI stock. Although it sells at an outlandish price-to-book ratio, its rapid growth may ease concerns about overvaluation.
In comparison, Palantir has become a pricey stock, likely in anticipation of higher revenue from AIP. Still, the current revenue growth rate and forecasts do not match Nvidia's growth or point to a massive AI-driven increase in revenue. Investors should watch Palantir for signs of massive growth and reevaluate accordingly.
Still, without such signs, Nvidia is more likely to remain the better wave rider of these two AI stocks.
