Businesses are spending more than ever on artificial intelligence (AI). Hyperscalers are building new data centers and outfitting them with the necessary equipment for training and running large language models. On top of that, practically every business in the world is looking at how to integrate AI into its operations to improve workforce productivity and expand its addressable markets.
Two companies have recently seen their stock prices head higher on optimism about the future growth in AI spending. Palantir Technologies (PLTR 2.59%) shares are up 93% from their April low, as of this writing. Taiwan Semiconductor Manufacturing (TSM 1.60%) is up 67% in that same period.
But after their stellar runs over the last three months or so, Wall Street has differing opinions on the two stocks. One is still a buy at its current price, but the other is a sell based on median price targets from analysts. Considering analysts are generally a bullish bunch, a median price target below the current price of a stock is typically a bad sign.
- Palantir has a median price target of $110 per share based on 27 analyst ratings. That implies a downside of 26% from its price as of this writing.
- Taiwan Semiconductor Manufacturing has a median price target of $275 per share based on 48 analyst ratings. That implies upside of 17% from its price as of this writing.
Here's what investors need to know.
Image source: Getty Images.
Palantir: Growing fast and profitable, but 26% downside
Palantir is one of the biggest beneficiaries of advancements in AI capabilities over the last 20 years. Its software helps government agencies and enterprises collect and make sense of massive data sets using machine learning algorithms, improving operational efficiency and decision making. With the advent of generative AI, Palantir developed its Artificial Intelligence Platform (AIP), which enables users to interact with its software using natural language and create agents for interacting with data.
AIP has helped expand Palantir's use cases and addressable market, making it easier for new users to come on board. As a result, the company has seen its U.S. commercial revenue skyrocket over the last two years. It climbed another 71% year over year in the first quarter. Overall revenue growth came in at 39%.
On top of that, Palantir is exhibiting strong operating leverage. By focusing on product improvements and letting the product sell itself, Palantir has seen its adjusted operating margin expand to 44% in the most recent quarter.
The future looks bright for Palantir as well. It closed 139 deals worth more than $1 million in the first quarter, which led management to raise its full-year outlook for revenue and operating profits. But investors were ultimately disappointed with management's revised outlook, indicating there are already extremely high expectations for the company based on the stock price.
Indeed, Palantir shares currently trade for approximately 90 times expected revenue over the next 12 months. That's not just expensive, that's astronomically pricey. Its forward P/E above 200 makes it, by far, the most expensive stock in the S&P 500. It's no surprise that many analysts expect the stock price to come back down as even a strong performance above analysts' expectations would still mean the stock is expensive.
TSMC: An industry giant with huge AI-driven upside
Taiwan Semiconductor Manufacturing Company (TSMC), is the biggest chip fabricator in the world. It commands about two-thirds of all spending on chip manufacturing, and that share continues to grow larger as demand for high-end AI chips drives the market.
TSMC's ability to maintain and grow its massive market share stems from its leading technology. That attracts the biggest customers designing the most advanced chips in the world, including Nvidia and Apple. And with such a huge revenue base relative to other chip manufacturers, it's able to reinvest more in R&D to ensure its technology remains best in class.
TSMC's next-generation technology, its 2-nanometer node, is expected to fetch premium prices relative to its current 3-nanometer node. Management is already seeing strong demand for it, expecting "the number of new tape-outs for 2-nanometer technology in the first two years to be higher than both 3-nanometer and 5-nanometer in their first two years." TSMC should be ready to start volume production for that node in the next few months.
Demand for high-end chips has exceeded management's expectations, leading it to raise its full-year revenue growth outlook for the business to 30% instead of mid-20%. Moreover, the order volume of its most advanced nodes has also led to higher gross margins, which came in at 58.6% last quarter. With premium pricing planned for the next-generation process, TSMC should be able to maintain those high margins over time.
Even after the strong increase in stock price over the last few months based on its terrific operating results, TSMC stock trades for just 24 times forward earnings expectations. With strong revenue growth and its ability to maintain its extremely high gross margin, that may still be a bargain for the stock. Wall Street analysts seem to think so, with all but two analysts giving it a buy or equivalent rating.
