Palantir was a big winner in 2024, but the two companies could dramatically outperform in 2025.
Palantir Technologies (PLTR -3.72%) The artificial intelligence (AI)-powered enterprise software company’s strong start to the year culminated in September. The company’s strong earnings report and addition to the S&P 500 in the same month led to a large amount of buying interest in the company’s stock. The market continues to push the stock higher, with the company’s market capitalization exceeding $187 billion as of this writing.
Palantir’s financial results were excellent. But many analysts think the stock is getting ahead of itself. Of the 22 Wall Street analysts who cover the stock, only three give it an overweight or buy rating. Furthermore, none of the companies has a 12-month price target that exceeds the current share price. In fact, Palantir’s stock valuation makes it a tough buy right now.
But investors looking to add AI stocks to their portfolios have plenty of other options. And the other two companies look much more attractive than highly rated Palantir. In fact, I predict that both will be worth more than Palantir by the end of 2025 due to their better relative price performance against the big winners in 2024.
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1. Palo Alto Networks
Two major changes are occurring that will increase demand for Palo Alto Networks. (PANW -1.23%) Cyber security services. More and more companies are moving their data and software needs from on-premises storage and computing to cloud computing. Moving to the cloud and adopting a hybrid approach increases the number of potential attack points for cybercriminals. Additionally, most workplaces have adopted a hybrid approach of working from the office and working from home. Again, this opens up even more potential security vulnerabilities.
Palo Alto provides security solutions across our clients’ networks (firewalls) in both hardware and software form. We also offer cloud and endpoint security solutions to ensure only authorized devices can access sensitive network data.
Many cybersecurity providers rely on machine learning artificial intelligence to detect cybersecurity threats early and resolve vulnerabilities. One of the biggest challenges in building effective systems based on machine learning is accessing valuable data. As a leader in this space, Palo Alto has significant data advantages over its competitors.
As a result, the company’s AI efforts are working better than its competitors and have achieved significant results. Additionally, Palo Alto’s capabilities make it more attractive to new customers, who have access to more valuable data than their competitors, creating a virtuous cycle.
In addition to that, it is important to consider switching costs for existing customers. Few security analysts would risk their jobs to save their company a few bucks on a competing product. Quite the contrary, as your needs grow, you’re more likely to return to Palo Alto Networks. Palo Alto has expanded its offerings over time through bolt-on acquisitions and has had great success in cross-selling new products to customers.
Gross margins should continue to rise over time as the company moves to more software-based solutions and increases cross-selling to customers. Therefore, investors should be certain that profits will grow significantly more than revenues in the foreseeable future.
Palo Alto stock currently trades at an enterprise value to earnings ratio of 14.6 times. That’s a fair price to pay. And if the company maintains that multiple through fiscal 2025, the stock should rise about 14%, based on analyst forecasts. As of this writing, the market capitalization is $124 billion, and its value at the end of 2025 will be approximately $142 billion. Palantir stock would need to fall about 24% from today’s price to fall below Palo Alto’s potential market capitalization.
2. Micron Technology
When it comes to semiconductors, just a few companies are getting the most attention. Most people are familiar with major GPU manufacturers like Nvidia. But one company that makes key components for AI chips like Nvidia’s is Micron Technology. (MU -1.32%).
Micron supplies memory chips, including standard DRAM and NAND chips, found in PCs and smartphones. It also makes a chip called high-bandwidth memory (HBM) that manufacturers like Nvidia include in their high-end GPUs. As a result, Micron has benefited greatly from increased spending and development in artificial intelligence.
Micron’s data center revenue increased more than 400% year over year in the first quarter ended November. This division, led by HBM chips, currently accounts for more than 50% of Micron’s total sales.
Executives are very optimistic about AI’s potential to transform business. The HBM market is expected to grow from $16 billion in 2024 to $100 billion by 2030. Given that only three companies, including Micron, make HBM chips, Micron is sure to enjoy its fair share of that growth.
Strength in the data center business could offset short-term weakness in the consumer segment. Management lowered its outlook for the second quarter due to customer inventory reductions from PC and smartphone suppliers.
The slowdown in the consumer sector illustrates the biggest risk of investing in Micron: cyclicality. Micron manufactures its own chips in-house. This requires a large upfront capital investment, but costs increase relatively steadily as production capacity expands. Micron’s chips are effectively compatible with competitors’ chips, which makes them more like a commodity.
In other words, when there is strong demand for Micron’s chips, production costs remain relatively flat, leading to more orders and better pricing. When demand decreases, you earn less, but you’re still paying the same amount, potentially resulting in a negative return on invested capital.
Micron is likely to see very strong demand for its HBM chips in 2025, as several major tech companies have announced plans to significantly increase data center spending. That should more than offset weakness in the consumer sector, with analysts expecting sales to rise 39.6% this year. With an enterprise value to earnings ratio of 3.7 at the time of writing, the stock appears undervalued despite cyclical risks.
If the company’s price multiple expands to 4x next year and analysts’ predictions come true, Micron’s stock price will rise about 50% next year. That would give the company a market capitalization of about $150 billion. If Palantir stock falls 20% over the next year, it will fall below that number.
Regardless of whether Micron or Palo Alto Networks ends up being worth more than Palantir by the end of 2025, both look much more attractive than the premium companies at today’s prices.
