Although there have already been a few obstacles this year, technology and artificial intelligence stocks have been on a tear for nearly 2.5 years. Of this group, few have excelled more than the decision-making AI company Palantir (PLTR +0.12%). From its mysterious and exciting work for the Department of Defense to its impressive quarterly earnings results, retail and institutional investors can't buy enough of this stock.
Since going public in October of 2020, Palantir is up an incredible 1,105% and trades at a mind-boggling 200 times forward earnings. The company's market cap is now over $250 billion. While the run has been astounding, I think it's time for investors to cash in their winnings.
As a pair trade, I'd recommend fading Palantir and buying this fantastic AI stock instead, which trades at a big discount.
Fade Palantir: The valuation has grown too far, too fast
I don't think anyone doubts that Palantir is an impressive company. It essentially bridges the gap between complex AI language models and human analysis so people working inside government agencies and businesses can gather and leverage data like never before, which can then be used to help the organization achieve its goals, whether that's for national security or optimizing a part of its business.
Government clients use Palantir's Gotham system to collect different types of data from different sources. AI then pulls together insights, outlines potential scenarios, and offers potential courses of action, all in real-time to help with decision-making. Palantir also launched five-day boot camps for potential business customers, which helped these businesses identify issues and then showed how Palantir's solutions could be used to offer solutions to these problems. This initiative turned out to be very successful.
NASDAQ: PLTR
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Recently, Palantir reported blowout fourth-quarter earnings, in which the company beat on earnings and revenue and issued better-than-expected guidance. The stock zipped another 25% higher. While it's all impressive, investors should always remember that great businesses can trade at bad prices, and bad businesses can trade at attractive ones.
Jefferies analyst Brent Thill recently issued a research note, more than doubling his price target on Palantir from $28 to $60, but Palantir already trades at around $111 (as of Feb. 9). Thill noted that management's revenue guide calls for 31% growth, 2 percentage points more than what it did in 2024. For Palantir to keep trading at its current valuation, Thill estimates the company would need to grow 50% over four years and trade at 18 times the 2028 calendar year projected revenue. It's always possible that Palantir will grow into its current valuation, but the risk-reward trade-off has gotten significantly worse, making the company more vulnerable to sell-offs.
Why not buy an exciting AI company at a cheap valuation?
Investors have seemingly snapped up shares in any company that proves it has an AI edge. However, the market has only recently had the opportunity to own Nebius Group (NBIS +0.16%), an AI infrastructure company that only rejoined the Nasdaq in October of last year. The assets that Nebius owned were a part of the Russian search giant Yandex.
However, after Russia initially invaded Ukraine, certain sanctions pushed Yandex off the Nasdaq. Through a complex process, Yandex would eventually split off four AI businesses into what is now the Dutch-based Nebius. Those businesses include cloud, data labeling, edtech, and autonomous vehicles. The most prominent of the businesses is its AI cloud business, which some describe as AI-as-a-service.
Companies wading into the world of AI need graphics processing units (GPUs), circuits that can compute a tremendous amount of calculations simultaneously. This makes them ideal for training large language AI models. Nebius has a lot of this infrastructure in massive data centers and then rents out GPU space to companies building AI programs that don't want to build all of the necessary infrastructure needed to support it.
NASDAQ: NBIS
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Nebius has plenty of room to run
Nebius got a huge endorsement when it raised a $700 million private round of financing that included Nvidia as one of the main investors. Nebius, on its website, says its clients will have access to Nvidia's cutting-edge Blackwell chips. Nvidia likely sees companies like Nebius as a way to grow the overall market and potentially expand its own client base as well.
In terms of financials, Nebius had close to $2.3 billion of cash and equivalents at the end of last September and very little debt. The company plans to invest $1 billion in its AI infrastructure in Europe by the middle of this year and significantly expand its data center in Finland by 2026. Management thinks they can achieve an annualized revenue run rate of $750 million to $1 billion by the end of 2025.
Some investors think Nebius is similar to an AI infrastructure company called CoreWeave. CoreWeave is rumored to go public soon at a $35 billion valuation. Despite Nebius' stock rising over 90% since rejoining the Nasdaq about five months ago, the company still only has a roughly $9 billion market cap.
