Palantir (PLTR 3.05%) has been one of the most explosive AI stocks to own over the past few years, rising 2,370% since the start of 2023. While some believe that Palantir can keep those returns up, I'm a bit more skeptical, and I think several companies will outperform Palantir, most notably is Alphabet (GOOG 2.49%) (GOOGL 2.30%).
It may seem a bit odd that I'm picking an established tech player to outperform one of the most exciting growth stocks over the next decade, but after digging into the numbers, it's clear that Alphabet has a strong chance.
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Palantir's growth case is more promising than Alphabet's
Palantir provides AI-powered data analytics software to its clients that helps them make the best-informed decisions at all times. It also has tools to automate tasks through AI agents. Originally, this software was developed for government use, but it expanded to the commercial sector within the past decade. Palantir has seen monster growth over the past few quarters, with Q2 posting the fastest growth yet: 48% year over year to $1 billion.
NASDAQ: GOOG
Key Data Points
Alphabet is a legacy player and generates a ton of money from its Google family of products. While many are concerned that generative AI may replace Google Search, management has done a great job integrating AI with its AI search overviews, which provide a generative AI-powered summary of each search result. Google is still the dominant player in the search engine realm, and its Q2 revenue growth rate of 12% showcases this. Overall, Alphabet grew revenue at a 14% pace in Q2, which is far slower than Palantir.
With Alphabet's much slower growth rate, how can I expect it to outperform Palatnir over the next decade?
Stock valuation plays a huge role in investing
Growth isn't everything when investing. Even if it's the best company in the world, it can turn out to be an investing failure if you pay the wrong price for it. That's exactly where Palantir is right now, as it has unbelievable growth already baked into its stock price.
Palantir trades for a jaw-dropping 245 times forward earnings and 117 times sales.
PLTR PS Ratio data by YCharts
Compared to Alphabet's 6.9 times sales and 21 times forward earnings, Palantir's stock looks far more expensive. However, the question here is whether Alphabet's solid, but slower growth, can outperform Palantir's rapid growth, but at an expensive price tag? Let's run the numbers.
Although Palantir grew revenue at a 48% pace in Q2, Wall Street analysts expect Palantir's Q3 revenue growth to be 45% and 2026's growth to be 35%. However, let's give Palantir the benefit of the doubt and say it can grow at a 40% compounded annual growth rate (CAGR) for the first five years of this decade-long analysis and 15% after that. By the end of the decade, Palantir would have revenue of $37.2 billion. That's over 10 times its current $3.4 billion it generated over the past 12 months. If Palantir could achieve a 35% profit margin, it would produce $13 billion in profits.
That's an extremely bullish outlook for Palantir. The problem is that it doesn't allow it to outperform Alphabet.
If we divide Palantir's current market cap of $377 billion by 2035's projected profits, we'd get a forward P/E of 28.9. Alphabet's stock is priced at less than that now and it would have a decade of growth to push its current stock price higher.
The reality is, Palantir has at least five years, if not a decade, of growth already baked into the stock price. That's not a positive sign for investors, and it's why I think Alphabet can outperform Palantir over the next decade easily.
