Which tech stock is better?

In this piece, we evaluated two technology stocks: Palantir Technologies (PLTR) and Alphabet (GOOGL). A closer look suggests a neutral view on Palantir and a bullish view on Alphabet.

Palantir Technologies specializes in big data analytics, while Alphabet is a holding company that owns the Google search engine and sells apps and content on Google Play and YouTube. Alphabet also generates revenue from cloud service fees, licensing revenue, and hardware products like Chromebooks and other devices.

Palantir shares have soared 80% year-to-date and doubled in the past year, rising 111%. Meanwhile, Google shares are up 19% year-to-date and 27% over the past 12 months.

With such a dramatic difference in their year-to-date returns, the sizable difference in their valuations comes as no surprise. We compare their price-to-earnings (P/E) ratios to gauge their valuations against each other and the software industry.

For comparison, the tech industry trades at a P/E of 46.3x versus a three-year average of 39.3x.

Palantir Technologies

At a P/E of 182.3x, Palantir Technologies appears significantly overvalued relative to its industry. While the forward P/E of 80.3x looks much more attractive, this stock is a bit too hot to handle right now, suggesting that a neutral view might be appropriate – pending a more attractive valuation.

Although Palantir Technologies is primarily a cloud or software-as-a-service stock, its valuation has risen this year thanks to the potential of artificial intelligence. In early August, the company raised its full-year revenue outlook on the strength of its AI platform, marking the second time it has done so this year.

Palantir is essentially where Alphabet or Google was a few years ago. It can’t be wrong, and investors are happily pushing their valuation endlessly through the roof. However, Palantir isn’t Alphabet yet, so things will have to slow down at some point, which is why I think a wait-and-see approach is best right now.

In fact, investors with a position in Palantir may want to consider taking some profits now, anticipating an inevitable decline. Patience is the name of the game with Palantir stock right now.

What is the price target for PLTR stock?

Palantir Technologies has a consensus rating of Hold based on three buy ratings, five hold and six sell ratings assigned in the past three months. At $25.42, Palantir’s average price target implies a downside potential of 17.97%.

See more PLTR analyst ratings

Alphabet

At a P/E of 24.2x, Alphabet hasn’t been this cheap since about March, suggesting this may be a unique buying opportunity in this stellar stock. Thus, a bullish view seems appropriate, especially since this is a stock that investors may want to consider buying and holding for the very long term.

The story continues

Last quarter, Alphabet’s quarterly cloud revenue topped $10 billion for the first time, accounting for more than a third of its $84.7 billion in total revenue. Thus, Alphabet is very much a cloud play, even as it offers diversified exposure to a wide range of technology sectors.

While Alphabet hasn’t been this cheap since March, a review of its October 2019 valuation shows it trading at the bottom of its recent July peak, when it topped out at around 29x. The stock has also traded toward the bottom to mid-point of its P/E range since October 2019. Alphabet’s P/E has ranged from around 17x in November 2022 to 39x in April 2021.

So this is a great time to pick up some Alphabet stock — or at least add to an already established position.

An analysis of Alphabet’s long-term stock price gains demonstrates why this is a stock to buy and hold for the long term. One could argue that the company has earned blue-chip status, which is why it’s a buy-and-hold position.

In addition, Alphabet’s shares have risen 15% over the past three years, which has been a challenge for tech stocks in general. The stock is up 183% over the past five years and 463% over the past decade, again indicating that the overall trend for Alphabet is up and to the right, even during times that are challenging for the tech sector as a whole.

What is the price target for GOOGL stock?

Alphabet has a Strong Buy consensus rating based on 28 buys, seven holds and zero sell ratings assigned over the past three months. At $205.03, Alphabet’s average stock price target implies a potential upside of 24.50%.

See more GOOGL analyst ratings

Conclusion: neutral on PLTR, bullish on GOOGL

While Palantir could become a stock worth buying and holding for the long term, its current valuation has simply carried it forward. Like Alphabet, Palantir posted impressive three- and five-year earnings, but when the stock last topped $30 a share in February 2021, a correction soon followed. Thus, investors should be aware of the volatility around the corner.

Importantly, Palantir Technologies is rated as a growth stock, while Alphabet stock has moved into value stock or bullish territory. However, Alphabet is too cheap to ignore right now, especially because of its core status. Thus, a review of their valuations reveals that Alphabet is the clear winner of this pair.

Disclosure