Nvidia (NASDAQ:NVDA) and palantir (NASDAQ:PLTR) are two of the best-performing stocks on the market this year, and the main reason for that is artificial intelligence.
Nvidia needs little introduction at this point. With the AI boom, chip stocks have come to dominate the data center GPU (graphics processing unit) market, and the company’s stock price has increased approximately 10 times since the beginning of 2024. Meanwhile, Palantir emerged as the biggest winner. Especially since the launch of the Artificial Intelligence Platform (AIP) last year, experience with deep data mining, known as data fusion, has led to the development of AI-powered software.
As the charts below show, both stocks have soared this year.
PLTR data by YCharts
So, which one should you buy today? Let’s take a closer look at the characteristics of each brand.
Image source: Getty Images.
Nvidia has established itself as a leading chip design company thanks to its strong capabilities in AI and investments in areas such as the CUDA software library that give it a competitive advantage.
As a result of its strong lead in AI-focused components like the new Blackwell platform, Nvidia is currently generating a massive third-quarter generally accepted accounting principles (GAAP) operating margin of 62%.
The company has built an all-star culture focused on innovation and will continue to stay ahead of its competitors in AI chips. The company relies on foundries such as Taiwan Semiconductor Manufacturing Co. for manufacturing, making it susceptible to broader concerns about cyclicality and the AI bubble. The semiconductor industry is notoriously cyclical, and prices and inventory levels can change rapidly. Therefore, NVIDIA’s biggest risk may not be competitive threats, but rather changes in industry trends that threaten NVIDIA’s growth.
Palantir began serving the U.S. intelligence community after 9/11, connecting data points to help uncover threats that would otherwise have been missed. Since then, Palantir has expanded its product suite to specialize in a wide range of business needs, including cryptocurrencies, data protection, and anti-money laundering.
Its major software platforms include Gotham, Foundry, Apollo, and Artificial Intelligence Platform (AIP). Gotham and Foundry are focused on taking large amounts of information and turning it into useful datasets.
Apollo is a layer for commercial customers that enables software to run in almost any environment, and AIP is working with Gotham and Foundry to use machine learning to accelerate insights.
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Palantir handles large contracts because it has a relatively small number of high-paying customers. The size and complexity of the contract means the company faces relatively little competition from other software companies. Rather, the company views its customers’ in-house software development efforts as its biggest competition.
Like Nvidia, Palantir is at risk of sector-wide setbacks, but its competitive position appears resilient given the specialized nature of its business.
Both Nvidia and Palantir have achieved impressive results, but one company is clearly growing faster than the other.
Nvidia reported a 94% increase in third-quarter revenue to $35.1 billion and a 109% year-over-year increase in net income to $19.3 billion.
Meanwhile, Palantir reported strong results in the U.S. and its commercial division, with sales increasing 30% to $726 million. Net income increased 103% to $149.3 million as margins expanded rapidly.
Palantir’s explosive growth this year is largely due to multiple expansions. As a result, the stock is trading at a very high valuation. Palantir currently trades at a price-to-sales ratio of 75x and a price-to-earnings ratio of 411x based on GAAP earnings.
Nvidia stock looks more reasonable. It currently trades at a price-to-sales ratio of 31 times and a price-to-earnings ratio of 55 times.
Both of these companies have a lot to offer investors, especially if the demand for AI continues to grow, but when looking at both stocks collectively, Nvidia is the better buy.
Palantir’s business is certainly interesting. It has demonstrated its value to customers and appears to have a significant competitive advantage. However, such valuations come with significant risks, as the stock price could easily plummet if expectations are not met.
NVIDIA, on the other hand, looks poised for similar growth, but with less downside risk.
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*Stock Advisor returns as of December 23, 2024
Jeremy Bowman has no position in any stocks mentioned. The Motley Fool has positions in and recommends Nvidia, Palantir Technologies, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
Improving AI stocks: Nvidia vs. Palantir? Originally published by The Motley Fool
