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

Data is at the heart of artificial intelligence (AI) technology. Artificial intelligence is helping humans understand and analyze data like never before, and these powerful models depend on data to learn and train. Two hot data stocks are at the forefront of AI: Palantir TECHNOLOGY (NYSE: PLTR) and Snowflake (NYSE: SNOW).

Both are proving to be an integral part of implementing AI, whether in applications or on the back end with data storage and querying.

However, these two stocks moved in different directions. Palantir was a sensation on Wall Street, while Snowflake steadily declined after a fiery initial public offering. What is the best AI stock to buy today?

Mission-critical AI software

Both companies’ products are critical to deploying AI, as most organizations lack the development capacity to build their AI applications, or at least lack well-structured data to integrate them into applications.

Palantir builds custom software applications for businesses and governments to implement AI and data analytics technology. The company has worked with the US government for years and has increasingly expanded into the private sector with commercial applications ranging from manufacturing supply chains to operating large hospitals. Palantir’s revenue growth has accelerated since last summer, after it launched its artificial intelligence platform (AIP) for deploying AI applications.

Snowflake is a cloud-based data storage platform that enables businesses to securely store, organize, and query data. The company currently works with 736 of the Forbes Global 2000. Its cloud-neutral platform works with major cloud providers, giving customers valuable flexibility over being locked into a single platform. Snowflake’s billing is based on usage, so it can grow as businesses create and query more data. The company has a robust net income retention rate of 127%.

Finances tend in opposite directions

Snowflake and Palantir are businesses of similar size today. Over the past four quarters, Snowflake generated $3.2 billion in revenue and $815 million in free cash flow, compared to Palantir’s $2.5 billion in revenue and $696 million in free cash flow . But it became apparent that these two companies were moving in opposite directions.

You can see that Snowflake’s revenue growth rate is slowing, while Palantir’s has been accelerating since last summer:

The two companies are also miles apart in terms of bottom line profitability. Snowflake generates a lot of free cash flow by issuing stock-based compensation. When you factor everything in by looking at generally accepted accounting principles (GAAP) revenue, Snowflake has lost more than $1 billion over the last four quarters. Meanwhile, Palantir is also GAAP profitable and net income is growing:

The story continues

Snowflake has no financial problems. The company is cash flow positive and has over $3 billion in cash and zero debt on its balance sheet. Still, the steep GAAP losses are worrisome because they raise the question of how much dilution investors have to bear. Stock-based compensation increases the number of shares and decreases the value of existing shares because they represent a smaller share of the company.

What is the best AI stock?

Palantir’s accelerated revenue growth and ample profits make it the clear winner over Snowflake. It’s the better AI stock until Snowflake stabilizes its revenue growth and shows a better path to GAAP profits.

The market knows how these two companies fare — Palantir shares are up 154% over the past year, while Snowflake shares are down 24%.

Unfortunately, Palantir’s success has inflated the stock’s valuation to bubble-like levels. Today, Palantir trades at a price-to-sales (P/S) ratio of 38, higher than it was for most of 2021, when the market was in an Everything Bubble due to zero percent interest rates. It is among the highest you will find on the market today.

A great company can still be a bad investment if you pay too much for it, so investors should think twice about buying shares at these prices. Maintaining such high ratings is difficult without meeting ever-increasing expectations. There’s a good chance this will come back to bite stocks at the first sign of adversity or broader market volatility. Snowflake, meanwhile, is trading at a much more reasonable P/S ratio of 12. It might even be a better buy today if you think Snowflake will improve in the future. If not, try to be patient and wait for a better price to buy Palantir.

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies and Snowflake. The Motley Fool has a disclosure policy.

Best Artificial Intelligence (AI) Stock: Palantir Technologies Vs. Snowflake was originally published by The Motley Fool