In 2024, Palantir and Nvidia stood out as two prominent artificial intelligence (AI) stocks. Despite experiencing significant increases last year, both stocks have recently seen declines due to a market pullback.
Nvidia, a semiconductor company, and Palantir, a software analytics firm, have both achieved success in the AI sector, albeit through different business models. Nvidia’s graphic processing units (GPUs) have become fundamental to AI infrastructure, primarily due to their rapid processing capabilities, ideal for AI model training and inference. The company fortified its market position with the development of its CUDA software platform in 2006, which facilitates programmable use of its chips. Nvidia has since expanded this platform with cutting-edge libraries and services tailored for AI applications.
Conversely, Palantir has shifted from a primary focus on government contracts for critical data analytics and counter-terrorism applications to becoming a provider of AI operating systems. This transformation allows clients to design and implement AI-driven solutions.
Nvidia’s revenue has doubled over the past two years, fueled by the growing demand for AI infrastructure among major tech companies and AI start-ups. Major cloud computing firms plan to invest $250 billion in capital expenditures for AI infrastructure in the current year, and Nvidia forecasts this number will rise to over $1 trillion by 2028. Palantir, meanwhile, has reported increasing revenues, particularly in the commercial sector, alongside a surged U.S. commercial revenue of 64% and a 45% increase in U.S. government revenue last quarter. The company has also grown its customer base by 43%.
Despite these growth figures, the companies face risks. Nvidia could encounter challenges if AI infrastructure spending decelerates. Its CUDA platform is free, lacking a recurring revenue model, so sustained growth is reliant on increased chip sales. Although Microsoft, Nvidia’s largest customer, has scaled back on some data center projects, other companies like Alphabet and Amazon have offset this capacity. In advancing AI models, the demand for GPUs remains high, as evidenced by Meta Platforms and xAI’s increased GPU training for newer AI models.
Palantir faces potential setbacks due to U.S. government budget reductions, particularly the Department of Defense, which contributes over 40% of its revenue. With proposed cuts of 8% annually under the Department of Government Efficiency’s guidelines over the next five years, the impact on Palantir’s growth opportunities is uncertain, despite CEO Alex Karp’s optimism about beneficial outcomes from these efficiency measures.
The valuation of Nvidia’s and Palantir’s stocks reveals significant differences. Nvidia’s shares are considered inexpensive, trading at a forward price-to-earnings ratio of approximately 24 based on current analyst estimates and a price/earnings-to-growth ratio just above 0.4. In contrast, Palantir’s stock is relatively costly, with a forward price-to-sales multiple of 53, exceeding typical valuations seen in software-as-a-service stocks with comparable growth rates. These differences in valuation reflect the distinct revenue models of the two sectors, with software firms generally commanding higher valuations due to their recurring revenue streams.
Both companies possess potential growth drivers and inherent risks, and while the future of AI infrastructure spending remains uncertain, Nvidia currently appears to offer a more attractive investment opportunity given its valuation and industry position.
