Palantir Technologies (PLTR +0.99%) has been one of the most popular artificial intelligence (AI) investments in recent years, and for a good reason: It has delivered incredible returns to its shareholders. If you had invested $10,000 in it as the generative AI race took off at the start of 2023, your investment would have grown to be worth about $280,000 today. That's an unbelievable return in a relatively short time frame, but not all of those gains have been earned yet by the company. With Palantir trading at a price-to-earnings ratio of close to 600, a lot of expected future growth is already priced into the shares.
Given how overheated it has become, I don't anticipate its current growth spurt lasting much longer. I believe that could set up ASML (ASML -2.15%) and AMD (AMD -5.92%) to pass Palantir's market cap -- currently $426 billion -- by late 2026.
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Years' worth of aggressive growth assumptions are baked into Palantir's stock price
AMD and ASML's market caps are slightly smaller than Palantir's, at $350 billion and $405 billion, respectively. However, I think they could easily catch up, although their share price gains may not be based solely on their own immediate performance.
Although Palantir's stock is up around 2,700% since the start of 2023, its revenue has only risen by 80%. That's a huge mismatch, and it points to multiple expansion as the reason for Palantir's stock rise. While this mechanism can drive long-term shareholder returns (Apple stock is a great example), it's only reasonable to a certain level.
Palantir seems to have exceeded that level. Beyond its lofty trailing P/E ratio, it trades for 130 times trailing sales and 276 times forward earnings.
PLTR PE Ratio (Forward) data by YCharts.
These are unbelievable premiums that far exceed the valuation levels most stocks ever reach. However, because Palantir's growth rate is still accelerating, its market cap has continued to rise. As soon as Palantir's growth rate slows, I expect the stock to rapidly tumble.
Let's say that Palantir can grow its revenue at a sustained 50% pace over the next six years. Assume also that it can achieve a 35% profit margin. If it does, revenue and profits would grow from $3.44 billion and $772 million today to $39.2 billion and $13.7 billion six years from now. That would be an unprecedented sustained growth rate, but even if it achieves those things, the stock would still be valued at 31 times forward earnings. For reference, Nvidia, the king of AI hardware, trades for 30 times its expected 2026 earnings.
That's far too great a price to pay for Palantir, especially considering how unbelievably bullish the assumptions I've postulated are. I think this situation has left it vulnerable to a correction.
AMD and ASML are critical to the AI arms race
While AMD has long been a second-place player to Nvidia in the race to develop the GPUs that have become essential AI hardware, its fortunes seem to be changing. AMD and ChatGPT developer OpenAI recently announced a partnership under which OpenAI will buy up to 6 gigawatts of computing power from the chipmaker. As part of the deal, OpenAI will also wind up with new shares equal to about 10% of AMD, once all milestones are met.
While there are some questions surrounding how this deal will play out, AMD could see a ripple effect of other customers switching some of their GPU purchases from Nvidia's hardware to AMD's cheaper (but similarly capable) alternatives. This could drive a ton of excitement about AMD's stock, which is already up by about 40% in October. If business gains follow, AMD could easily be a bigger company than Palantir this time next year.
ASML is another key player in the AI realm. Its extreme ultraviolet (EUV) lithography machines are the only ones on Earth capable of manufacturing today's highest-end chips. Without them, AI technology as we know it wouldn't be the same.
ASML's vital role in the chip manufacturing process is secure because it has a technological monopoly on its product line. Such situations are quite rare, and when investors identify them, they should take action and invest accordingly. More of ASML's machines will be required to meet rising chip demand, which should help the company deliver solid growth in 2026. While investors shouldn't expect the stock to rocket higher, I think it can solidly beat the market.
Not only do ASML and AMD have solid growth trends acting in their favor, both are priced at much more reasonable valuations than Palantir is. AMD trades at 55 times forward earnings while ASML trades at 35 times forward earnings. That difference in their premiums will likely be enough to tip the scales in favor of AMD and ASML by the end of next year, which makes them better investments now.
