Micron Technology (MU -2.03%) and Palantir Technologies (PLTR +3.72%) are two of the hottest artificial intelligence (AI) stocks. Both companies generate phenomenal revenue and earnings growth as demand for their products soars, thanks to developments in AI. And the market hasn't let that go unnoticed.
Despite the pullback in software stocks in 2026, Palantir's share price is up more than 96% over the past year and 1,990% in the last three years. And Micron shares have continued to climb in 2026, and the stock is now up 349% in the past year. The market now values Palantir at $367 billion and Micron at $452 billion as of this writing, making them two of the biggest companies in the world.
But another AI stock may be underappreciated by the market right now. And despite its market cap closer to $320 billion, I predict it'll be worth more than both Micron and Palantir by next year.
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These AI darlings are expensive
There's no denying that both Micron and Palantir are producing excellent financial results right now. The biggest issue facing both companies is valuation.
At first blush, Micron's forward P/E ratio of 11.1 might seem like an incredible bargain. After all, the memory chipmaker is set to see earnings per share quadruple in its current fiscal year. Analysts expect even more growth next year.
But it's important to understand what's driving Micron's results. The sudden spike in earnings stems from growing demand for high-bandwidth memory (HBM) chips. As demand grows, Micron and the other memory chipmakers have reallocated capacity to meet it, but they've been slow to build new capacity.
As a result, prices for memory chips have spiked, increasing profits and margins. Price hikes might also artificially inflate demand from buyers front-running additional price increases, further exacerbating the near-term imbalance. Micron's management expects the supply constraints to remain through 2027.
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However, as more capacity comes online and the supply-demand equilibrium normalizes, prices will return to normal levels. With the additional expenses of its new capacity, operating expenses will remain high. Margins will compress, and earnings will decline. This is the cyclical nature of the semiconductor business, but it's especially pronounced in the commodity-like memory chip business.
Micron's P/E ratio has dropped into the low single digits at the peak of its earnings cycles. Based on historical data, investors expect the current earnings cycle to last well past 2028, even though management suggests supply will return to balance with demand by the end of next year.
Meanwhile, Palantir's forward P/E ratio of 118 and price-to-sales ratio of 90 are tough to swallow. Even though the company produced revenue growth of 70% last quarter and 56% for the full year, with improving operating margins, that valuation implies the incredible earnings growth will continue for years to come.
Analysts currently expect earnings per share growth to exceed 40% in both 2027 and 2028. But even with those lofty expectations, the stock trades for 60 times 2028 earnings forecasts. At its current valuation, a minor disappointment could send shares lower.
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As such, investors shouldn't expect the recent returns they've seen in Micron and Palantir stock to continue, given their current valuations. I predict both will trade around a $400 billion market cap by the end of 2027, if not lower.
The AI stock that will overtake Micron and Palantir
Meanwhile, another AI stock could see its valuation climb well past $400 billion by next year.
Despite a sharp sell-off in shares over the last couple of months, investors may have an incredible opportunity to buy shares of an AI cloud computing giant at an exceptional value. Alibaba (BABA -0.10%) may face competitive pressure and geopolitical risks, but its current valuation more than accounts for them. At a market cap of about $320 billion, it has significant upside from here.
Alibaba has seen its earnings drop significantly as it invests across both its retail operations and its cloud computing business. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) decreased 78% year over year in its second quarter, which ended in September.
On the retail side, revenue grew a respectable 16% last quarter. However, earnings were pressured by its push into "quick commerce," i.e., delivering items within an hour of a customer's order. The business requires significant scale to operate profitably, and Alibaba is spending heavily to promote it to customers and bring additional vendors and brands on board.
Unit economics improved last quarter, and management says they have continued improving since September. As quick commerce becomes margin-neutral, Alibaba should see a sharp recovery in its retail profits.
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Meanwhile, the opportunity in cloud computing remains massive. Revenue accelerated to 34% for the cloud division last quarter, driven by growing adoption of Alibaba's AI products. AI services are growing particularly quickly, up triple digits.
To support that growth, however, Alibaba is investing heavily in AI development and training to keep attracting more customers with its Qwen models. It's also spending heavily on infrastructure to support the growing demand.
Shares of Alibaba trade for just 21 times forward earnings expectations, which is a very attractive valuation for a company expected to grow earnings per share at a solid double-digit pace over the next two years after recovering from its current investment cycle. That price more than accounts for the risk of investing in China, and I expect the multiple to expand over the next couple years, pushing Alibaba's market cap above $400 billion by next year.
