Better Stock AI: Palantir vs. Microsoft

An estimated $1 trillion will be invested in expanding artificial intelligence (AI) services over the next few years, from GPUs to software. Many tech companies will benefit from this massive investment, but what will be the best long-term AI stocks to own?

Let’s take a quick look at two key AI players right now — Palantir Technologies (PLTR -0.70%) and Microsoft (MSFT -0.76%) — to see how each fares in their respective markets and what could be the better AI stock for years to come.

Image source: Getty Images.

The case for Palantir

Palantir has spent years building advanced artificial intelligence systems that government agencies use to sift through reams of data and make the best decisions. A large portion of its sales still come from government contracts — just over half — but the company has expanded its AI footprint in recent years into the commercial sector as well.

Revenue from the commercial segment grew 33% in the second quarter (which ended June 30) and accounted for about 45% of Palantir’s total sales. Why does commercial sales expansion matter to Palantir? Because it demonstrates that the company’s AI technology is robust and can be reused in a rapidly expanding AI market.

Not all companies can claim that. Consider what CTO Shyam Sankar said on the company’s recent earnings call about its edge over AI competitors: “Where the market is completely locked up is in that transition from prototype to production. And that happens to be where we are. the most differentiated.”

Indeed, while others are playing catch-up, Palantir is already benefiting from years of investment in AI. Management expects US commercial sales to grow 47% in 2024 to $672 million. Leadership also raised its full-year sales guidance to a range of $2.74 billion to $2.75 billion — up about 23 percent from last year.

The case for Microsoft

Microsoft may not be the most exciting name in AI right now, but it’s certainly one of the most important. The company has already invested about $13 billion in ChatGPT creator OpenAI, and its early bet on one of the most influential AI startups is already paying off.

Microsoft quickly put its investment to work by integrating ChatGPT’s core technology into its popular Microsoft 365 suite of software products, its GitHub developer platform, and Azure cloud computing services.

The biggest AI opportunity of all of this probably comes from Azure. After that, Microsoft has the second largest cloud computing service by market share (25% at the moment). Amazonand its new AI tools expand its reach. Management said on its fourth-quarter earnings call that Azure now has 60,000 AI customers, about 60% more than last quarter.

Why does this matter? Because cloud computing market sales will grow to about $2 trillion by 2030, according to Goldman Sachs. AI is already driving some of that growth, and Microsoft should benefit as more companies turn to its AI cloud services to enhance their own AI offerings.

Microsoft is the best AI stock

While Palantir has plenty of opportunity in the AI ​​market, there are two reasons why I think Microsoft stock is the better option. First, it’s much less expensive than Palantir stock.

Microsoft stock has a forward price-to-earnings (P/E) ratio of 32 right now. While not exactly cheap, it is much less expensive than Palantir’s P/E of 87.

Second, Microsoft’s substantial investment in OpenAI and its position in the cloud computing market means the company has access to some of the most advanced AI available today and an expanding market to deploy it.

With the cheaper price tag and a massive cloud AI market to tap into, Microsoft is now arguably a better long-term AI play than Palantir.