Best AI stock: Nvidia or Palantir

Nvidia (NASDAQ: NVDA) and Palantir (NYSE: PLTR) operate in different industries, but the two tech companies are profiting from the centuries-old expansion of the artificial intelligence (AI) market.

Nvidia’s GPUs are often associated with video games, but a growing number of data centers are installing its high-end GPUs to handle AI tasks. Palantir’s data mining platforms accumulate and process data from disparate sources to help government agencies and large corporations make AI-driven decisions.

Both companies have generated impressive gains over the past 12 months. Nvidia’s stock more than doubled as it continued to sell more gaming and data center GPUs. Palantir stock climbed around 160% as it dazzled investors with its robust income growth rates and optimistic long-term goals. But should investors who missed out on those gains consider buying either stock now?

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Nvidia’s main growth engines are in full swing

Nvidia’s revenue rose 53% to $ 16.7 billion in fiscal 2021, which ended in January, while its adjusted net profit climbed 75% to $ 6.3 billion. dollars. Its adjusted gross margin increased 310 basis points to 65.6%.

In the first half of fiscal 2022, Nvidia’s revenue grew another 75% year-over-year to $ 12.2 billion, as its adjusted net profit jumped 99% to $ 4.9 billion. Its adjusted gross margin increased 50 basis points to 66.4%. This growth was primarily driven by its gaming and data center GPU businesses, which generated 83% of its revenue in the last quarter.

Its gaming GPU business has benefited from higher video game sales throughout the pandemic and the use of some of its chips to mine cryptocurrencies, while a growing thirst for AI services has grown. boosted the data center market demand for its high-end GPUs. Nvidia’s takeover of network hardware maker Mellanox last year also boosted its data center revenues.

Analysts expect Nvidia’s revenue and adjusted profit to increase by 55% and 65% for the full year, respectively. Nvidia is exposed to the global chip shortage as it is a factory-less chipmaker that relies on third-party foundries, but rising market prices are making up for these slower shipments.

Palantir continues to silence bears

Palantir’s revenue grew 47% to $ 1.1 billion in 2020, while its government and business revenue grew by 77% and 22% respectively.

It posted a net loss of $ 1.17 billion, mainly due to stock-based compensation expenses of $ 1.27 billion, but its adjusted operating margin fell from 45% to 17%.

Bears initially claimed that Palantir would remain heavily dependent on rigid government contracts, that its business revenue growth would slow, and that it would remain deeply unprofitable.

But in the first half of 2021, Palantir’s revenue jumped 49% year-over-year to $ 717 million as it secured new government contracts and accelerated business growth. Its net loss widened again from $ 165 million to $ 262 million, but its adjusted operating margin rose to 33% as its adjusted profit before interest, taxes, depreciation and amortization (EBITDA) went from $ 20 million to $ 241 million.

Wall Street expects Palantir’s revenue to grow 38% this year, while the company plans to generate “at least” 30% annual revenue growth from 2021 to 2025. Palantir believes its platform to Data mining – which already serves dozens of government agencies – is becoming the “default operating system” for data in the US government. He then expects this relentless reputation to attract more business customers to his platform.

Valuations and challenges

Nvidia is trading at 55 times futures earnings and 25 times sales this year. These valuations may seem high, but they are quite reasonable compared to Wall Street’s optimistic expectations for the company.

However, investors should note that Nvidia’s $ 40 billion bid on Arm – which would add the world’s leading mobile chip designer to its portfolio – could still collapse amid regulatory challenges. If that happens, Nvidia’s shares could drop as investors reassess its future without Arm’s licensing business.

Palantir is trading at 34 times this year’s sales. This valuation also appears high, but it could be justified if Palantir achieves its goal of generating more than 30% revenue growth over the next four years.

But several headwinds, including competition in the corporate market, the loss of future government contracts and public scrutiny of its secret deals with government agencies, could further limit its long-term gains.

The winner: Nvidia

Palantir may be a more straightforward game in the AI ​​market than Nvidia, but it’s a much riskier investment. Nvidia is better diversified, more profitable and faces less controversy, and its stock is significantly cheaper.

Both of these stocks will likely benefit from the secular expansion of the AI ​​market, which Grand View Research plans to expand at a compound annual growth rate (CAGR) of 40.2% from 2021 to 2028. But if you can’t buy one of those high-growth tech stocks, I would stick with Nvidia.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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