Enhanced AI Investment Prospect: Palantir versus Microsoft
Palantir Technologies (PLTR, up 8.54%) and Microsoft (MSFT, down 0.10%) have both benefited from the surge in the artificial intelligence (AI) market.
Palantir collects vast amounts of data from various sources, helping its clients make quicker decisions. They're speeding up this process with AI tools that generate data.
Microsoft rules the roost with the world's largest PC operating system (Windows), the best-selling productivity software suite (Office), and the second-largest cloud infrastructure platform (Azure). As an investor in OpenAI, creators of ChatGPT, Microsoft has integrated their AI-generating tools into its services.
Over the past year, Palantir's stock has skyrocketed over 170%, while Microsoft's stock has only increased by less than 20%. Let's explore why Palantir outperformed Microsoft by such a vast margin, and if it's still the better AI stock for growth investors.
Palantir has a promising future, but its valuations are too high
Palantir manages two primary platforms: Gotham for government customers and Foundry for commercial clients. Gotham is widely used by U.S. government agencies, and Palantir endeavors to become the default operating system for data across the U.S. government. They've also been expanding Foundry to secure large commercial clients.
Following its direct listing in 2020, Palantir predicted an annual revenue growth of at least 30% through 2025. Despite soaring by 47% in 2020 and 41% in 2021, revenue growth slowed to 24% in 2022 and 17% in 2023.
Palantir attributed its slowdown to enterprise software spending headwinds and delayed government contracts. As its sales growth waned, it slashed spending and stock-based compensation expenses, turning profit according to generally accepted accounting principles (GAAP) in 2023.
Palantir forecasts a 26% revenue hike in 2024, while staying in the black according to GAAP. This growth is driven by new government contracts and the surging U.S. commercial market, along with the increasing demand for their AI services. The consistent profits also led to its inclusion in the S&P 500 this September.
Analysts predict a 26% revenue increase and 148% boost in earnings per share (EPS) for the entire year. From 2023 to 2026, they anticipate a 23% revenue compound annual growth rate (CAGR) and a 59% EPS CAGR.
These growth rates are impressive, yet its stock price is a stunning 186 times predicted 2023 earnings. This high multiple suggests it lingers on the coattails of the AI stock craze.
Microsoft continues to grow robustly at reasonable rates
Since CEO Satya Nadella, Microsoft underwent a strenuous "mobile first, cloud first" overhaul, restarting its growth. Nadella transformed Office's desktop software into cloud services and mobile apps, broadened Azure to meet Amazon Web Services, transitioned Windows into a central hub for its cloud, mobile, and AI services, and pursued aggressive hardware and Xbox gaming acquisitions.
From fiscal 2020 to fiscal 2024 (which ended in June), Microsoft's revenue had a CAGR of 14%, while its EPS boasted a CAGR of 20%. Azure fueled much of this growth, as more companies upgraded their cloud infrastructure to tackle the escalating usage of mobile, cloud, and AI services.
Microsoft's investments in OpenAI proved fruitful, as it merged OpenAI's AI-generating tools into its Copilot platform for Windows PCs and mobile devices. These add-ons bolstered Bing's position in the search market, united its productivity services with AI algorithms, and reached everyday users with its AI tools.
In the future, analysts project revenue and EPS growth rates of 15% each from fiscal 2024 to fiscal 2027. The stock currently looks moderately valued at 27 times the projected 2023 earnings, while it could remain one of the safest avenues to profit from the long-term expansion of the cloud, AI, and gaming markets. It could also profit from any unforeseen advantages if U.S. antitrust enforcers push Google to spin off Android or Chrome.
The better choice: Microsoft
Palantir has a bright future but assumes too many expectations are already priced into its astronomical valuations. Microsoft represents a more balanced approach to prosper from the AI industry. Thus, at this juncture, I believe it's more prudent to stay with Microsoft instead of chasing Palantir's AI-driven rally.
Investors looking to diversify their portfolios in the finance sector might consider investing in Microsoft's stock due to its robust growth and reasonable valuations. Despite Microsoft's annual revenue growth of only less than 20% over the past year, its stock is currently valued at a more moderate 27 times the projected 2023 earnings.
In contrast, Palantir's stock price is an staggering 186 times predicted 2023 earnings, suggesting that its valuations may be inflated due to the AI stock craze. While Palantir has a promising future with its expansion into commercial markets and government contracts, it may be wiser for growth investors to consider Microsoft's more balanced approach to profits.
