Best Artificial Intelligence (AI) Stock: Palantir Technologies Vs. Microsoft

Palantir Technologies (PLTR 0.71%) and Microsoft (MSFT 1.18%) have enjoyed divergent stock market fortunes so far in 2024, with one of these names posting significant gains while the other has underperformed so far.

Specifically, Palantir shares are up 75% in 2024. Microsoft, on the other hand, is up just 8% this year, with the company’s shares pulling back over the past month after a promising first half.

What’s worth noting here is that both Palantir and Microsoft have banked on artificial intelligence (AI) to drive their growth. The bright side is that both companies have seen an acceleration in their businesses due to the increasing adoption of this technology. However, if investors had to pick one of these AI plays for their portfolios right now, which one should they buy?

Let’s find out.

The case of Palantir Technologies

Palantir Technologies helps governments and enterprises around the globe integrate artificial intelligence into their operations with its Artificial Intelligence Platform (AIP), which has gained strong customer traction. This was evident from the sharp acceleration in Palantir’s growth in the second quarter of 2024.

The company’s revenue rose 27% year-over-year to $678 million, up from the 21% year-over-year growth it reported in Q1. A closer look at other revenue-related metrics will tell us that Palantir’s growth rate could continue to improve in the coming quarters. For example, Palantir’s remaining deal value ( RDV ) rose 26% year-over-year in Q2 to $4.3 billion. This metric refers to the total value of Palantir contracts still to be fulfilled at the end of a period.

So the strong growth in RDV, which almost matched Palantir’s peak jump, is an indication of the increasing adoption of its software platforms. It is worth noting that Palantir witnessed a significant expansion of its customer base in the last quarter. The company’s total number of customers increased 41% year-over-year in Q2 to 593.

Even better, Palantir customers have signed larger deals. It closed 96 deals worth at least $1 million in the previous quarter. Of those, 33 deals were worth $5 million or more, and 27 deals were valued north of $10 million. For comparison, Palantir closed 66 deals worth $1 million or more during the same period last year. Eighteen of those deals were worth $10 million or more, while 30 were valued at more than $5 million.

So there was a nice jump in the size of Palantir’s offering last quarter, along with good growth in the customer base. Artificial intelligence has played a central role in the company’s strong showing, with management saying on its most recent earnings conference call that “One of the most notable indicators of our delivery is the volume of existing customers signing expansion deals, many of which are a direct result of the AIP”.

Looking ahead, Palantir believes it should be able to “attach new customers and subsequently expand those engagements as we focus on taking our customers across the chasm from prototype to production.” Management gave several examples on the earnings call of how it helps businesses implement AIP and drive results, and this trend is likely to continue as the market for generative AI software is expected to grow at an annual rate of 58% by 2028, generating Annual Revenues of $52 billion in 2028.

Therefore, Palantir has a lot of room for long-term growth, given that it expects to post revenue of $2.75 billion in 2024, which would be a 23% increase from last year. The company’s improving revenue level is an indication that it is about to capture the big opportunity in the AI ​​software market, which is why it could continue to be a top AI stock for the long term.

The case for Microsoft

Although Microsoft has been one of the pioneers in the field of AI thanks to its partnership with ChatGPT developer OpenAI, it seems that the market is not giving enough love to its AI credentials. The stock has seen a pullback over the past month, losing 12% of its value. That’s despite Microsoft announcing better-than-expected results for the fourth quarter of fiscal 2024 (which ended June 30) on July 30.

The company’s revenue rose 15% year-over-year to $64.7 billion, while earnings rose 10% to $2.95 per share. Analysts would have been satisfied with $2.93 per share in earnings on revenues of $64.4 billion. Microsoft’s revenue from its Intelligent Cloud business rose 19% last quarter to $28.5 billion. The company’s Azure cloud services division posted 21% year-over-year growth, eight percentage points of which was driven by growing adoption of its cloud AI services.

Microsoft CEO Satya Nadella pointed out on its latest earnings conference call that the company ended the quarter with more than 60,000 customers using its Azure AI services, a nearly 60 percent increase over the same period last year. Nadella also added that the average spend per customer using its Azure AI services is increasing.

With a 23% share of the cloud computing market, Microsoft is in a strong position to benefit from the growing adoption of cloud AI services. Investors should note that Microsoft is the second largest player in the cloud infrastructure market after Amazonwhich has a market share of 32%. However, Microsoft has won over Amazon in this market.

With the cloud AI services market expected to grow nearly 31 percent annually through 2030, according to Fortune Business Insights, generating nearly $398 billion in annual revenue by the end of the forecast period, Microsoft has an opportunity to huge growth. . So investors would do well to consider the bigger picture, as Microsoft’s growing influence in the cloud computing market thanks to artificial intelligence could give its business a good long-term shot.

verdict

Palantir is growing at a faster rate than Microsoft right now, which is why investors looking for a fast-growing AI stock are likely drawn to the software specialist. However, investors will have to pay a hefty premium if they want to buy Palantir right now, as it trades at 29 times sales. Microsoft, on the other hand, is relatively cheaper, with a price-to-sales ratio of 12.

A similar story unfolds regarding their earnings multiples.

PLTR PE report data by YCharts

However, the chart above also indicates that Palantir’s earnings will grow at a much faster rate because the gap between its final and future earnings is quite large. Microsoft’s earnings, meanwhile, are expected to grow at a slower pace. More specifically, consensus estimates predict that Palantir’s earnings will grow at an annual rate of 85% over the next five years, which is significantly higher than Microsoft’s estimated growth of 15%.

So it all comes down to investors’ risk appetite as to which of these two AI stocks they want to buy right now. Those willing to pay a premium for a fast-growing company may consider buying Palantir, while Microsoft looks like a good option for investors looking for a stock that isn’t expensive but can deliver consistent long-term growth .