Palantir may face stiff competition in the software space from the AI giant that made its name selling AI hardware.
Palantir Technologies (supplement 0.56%) The company is rapidly emerging as the go-to provider of artificial intelligence (AI) software platforms for businesses and governments around the world, and the evidence can be seen in the company’s recent accelerated growth and improving revenue pipeline — both indicators pointing to better times to come.
Investors have noticed this and are buying Palantir shares in droves: The company’s stock is up 76% so far in 2024, and the following discussion may give you some insight into why.
Palantir’s AI software platform is attracting a lot of attention
Palantir released its second-quarter financial results last month, reporting that revenue grew 27% year over year to $678 million. This was a significant improvement over the 13% year-over-year increase the company achieved in the same period last year, and also an acceleration of its 21% revenue growth in the first quarter.
The company’s customer base has grown significantly, as has the size of the deals it has signed with its customers. Palantir management attributes the improved growth profile to the growing adoption of its Artificial Intelligence Platform (AIP), a software platform that helps businesses and governments integrate generative AI into their processes to improve operational efficiency.
From helping customers build their own large language model (LLM)-powered applications to accelerating everyday workflows with the help of generative AI, the usefulness of Palantir’s AIP seems to be resonating with customers, which is why the company has raised its revenue growth forecast for 2024 and expects sales to rise 24% this year to $2.75 billion.
More importantly, Palantir looks set to maintain its impressive growth over the long term, given that it ended last quarter with $4.3 billion in remaining contract value (RDV). This metric refers to the total remaining value of Palantir’s contracts at the end of a period, and it grew 26% year over year in Q2.
This AI hardware giant is making big strides in the AI software market
In short, Palantir appears well on its way to making the most of the huge end-market opportunity in the generative AI software market.However, there are other ways investors can capitalize on the surge in demand for AI software that, upon closer inspection, investors may find are better AI software stocks than Palantir.
NVIDIA (NVDA -4.08%) NVIDIA has been the go-to choice for enterprises looking to purchase high-end AI hardware for training their AI models, which has resulted in the company seeing impressive revenue and profit growth in recent months. Interestingly, comments from CFO Colette Kress during a recent earnings call suggest that NVIDIA is also starting to make inroads into the enterprise AI software market. According to Kress, “We expect our software, SaaS and support revenue to reach $2 billion annually this year, with NVIDIA AI Enterprise being a particular contributor to that growth.”
CEO Jensen Huang also commented, noting that customers can deploy NVIDIA AI Enterprise software for $4,500 per graphics processing unit (GPU) per year. Given that NVIDIA’s AI GPUs can cost more than $30,000 per chip depending on the configuration, enterprise customers looking to build and deploy AI models can get a good deal through NVIDIA’s AI software platform.
Nvidia offers several AI software products to its customers, including its AI Foundry platform, released in July this year, which is an end-to-end solution that allows customers to build and deploy custom generative AI models. Nvidia offers popular foundational models that customers can tweak to quickly bring AI applications (such as chatbots, content creation tools, document processing tools, etc.) to production.
Nvidia also offers pre-trained and customizable AI workflows that can be used to extract data from PDFs, create customer service workflows, accelerate drug discovery in healthcare, and build custom generative AI apps tailored to an organization’s needs. Notably, the adoption of Nvidia’s software solutions is growing at a phenomenal pace thanks to AI.
During its February earnings call, NVIDIA management noted that the company’s software and services offering is on track to hit an annualized revenue run rate of $1 billion in the fourth quarter of fiscal 2024. That means the company’s software and services revenue run rate is on track to double in just one year, significantly faster than the pace of Palantir’s sales growth this year.
Nvidia stands to benefit greatly from surging demand for AI chips, and when you add in the fact that the company’s revenue is expected to grow 122% year over year to $30 billion in the second quarter of fiscal 2025, the chipmaker clearly represents a more diversified investment in the AI space. Another thing to note here is that Nvidia’s stock trades at 28 times sales, lower than Palantir’s 29 times sales.
Moreover, when comparing the two companies’ earnings multiples, Nvidia is the more attractive AI stock.
NVDA price-to-earnings data from YCharts
So investors looking for a cheaper alternative to Palantir to take advantage of the growth in the AI software market might want to take a closer look at Nvidia, especially considering the latter’s AI hardware business is already thriving, making it a good growth stock to buy right now.
