Investors should never take forecasts at face value. Here are the details required to make an informed decision about these two companies.
Palantir helps businesses manage and make sense of complex data. Its primary platforms, Gotham and Foundry, integrate information and artificial intelligence models into an ontology, a digital representation of the relationships between real-world objects. Users can interact with the ontology through analytical applications that surface insights to improve decision-making. Palantir says its ontology-based software is an important differentiator.
Last year, Palantir debuted AIP (Artificial Intelligence Platform), which enhances Foundry and Gotham with support for large language models, allowing businesses to integrate generative AI into analytical applications. Some analysts are impressed by the product. For instance, Forrester Research has recognized Palantir as a leader in artificial intelligence and machine learning platforms.
Other analysts are less impressed. Consultancy Gartner didn’t even mention Palantir in its latest report on data science and machine learning platforms, and scored the company below a dozen other vendors for its data integration tools. Additionally, RBC Capital analyst Rishi Jaluria told CNBC that Palantir “does not appear to be anything truly differentiated when it comes to generative AI.”
Palantir reported solid financial results in the second quarter. Revenue increased 27% to $678 million, the fourth consecutive sequential acceleration, and non-GAAP net income jumped 80% to $0.09 per diluted share. CEO Alex Karp attributed the strong quarter to an “unrelenting wave of demand from customers for artificial intelligence systems that go beyond merely performative and academic.”
In the third quarter, Palantir announced a $100 million contract with the U.S. government that will bring access to its AI targeting tools to more military personnel. The company also said that gas and oil giant BP will adopt AIP to “improve and accelerate human decision-making with suggested courses of action based on automated analysis of the underlying data.”
The problem with Palantir is its sky-high valuation. Wall Street expects its adjusted earnings to grow 22% over the next year. That makes the current valuation of 134 times adjusted earnings look outrageous.
Wall Street’s median price target for Palantir is $28 per share, which implies a 35% downside from its current share price of $43. By that measure, Palantir is the most overvalued stock in the S&P 500.
I doubt Jaluria is correct about Palantir declining 79%, but I do believe the stock is headed for a serious correction at some point. Prospective investors should avoid Palantir until the share price looks more reasonable, and current shareholders should consider trimming their positions.
Super Micro Computer builds servers, including full server racks outfitted with storage and networking, to provide a turnkey data center infrastructure solution. Internal manufacturing capabilities and modular design allow the company to bring new products to market more quickly than its competitors. That time-to-market advantage has helped Super Micro win a leadership position in artificial intelligence servers.
Super Micro reported mixed results for the fourth quarter of fiscal 2024 (ended June 30). Revenue increased 143% to $5.3 billion on strong demand for AI computing infrastructure. But gross margin declined about 6 percentage points to 11.2%, and non-GAAP net income increased only 78%. Comparatively, the bottom line grew more slowly than the top line, which may signal a loss in pricing power amid increased competition.
However, management said margin contraction was due to costs associated with direct liquid cooling (DLC) components. Liquid cooling is more efficient than air cooling, so Super Micro has invested heavily to position itself as a leader as the technology takes root.
That may enhance its standing in the AI server market. Either way, management expects gross margin to return to normal (14% to 17%) by the end of fiscal 2025 as DLC components ship in higher volume.
The problem with Super Micro is regulatory uncertainty. In August, short-seller Hindenburg Research accused Super Micro of accounting manipulation, and The Wall Street Journal subsequently said the company was being investigated by the Justice Department. Neither situation has been resolved, and the stock could fall further than the 20% forecast by Wells Fargo analyst Aaron Rakers, depending on the outcomes.
However, Wall Street still expects the company’s earnings to increase 51% over the next year. That makes its current valuation of 20.8 times earnings look cheap.
Patient investors comfortable with the risks should consider buying a position, but I would keep it quite small until the regulatory uncertainty dissipates. Alternatively, shareholders nervous about Hindenburg’s allegations or the Justice Department’s investigation should consider selling their positions.
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Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewine has positions in Palantir Technologies. The Motley Fool has positions in and recommends BP and Palantir Technologies. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.
2 Popular Artificial Intelligence (AI) Stocks to Sell Before They Plunge 20% and 79%, According to Certain Wall Street Analysts was originally published by The Motley Fool
