Should You Forget Palantir and Buy These 2 AI Stocks Instead?

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Palantir‘s (NYSE: PLTR) stock hit a record high of $51.13 on Nov. 5. Its 223% year-to-date rally was driven by its accelerating revenue growth, soaring profits, and its inclusion in the S&P 500. The buying frenzy in AI stocks, expectations for lower rates, and the market’s post-election rally amplified its gains.

It’s easy to see why the bulls love Palantir. The analytics software company, which helps its government and commercial clients aggregate data from disparate sources to make smarter decisions, expects revenue to rise 26% this year — accelerating from its 17% growth in 2023 — as it stays profitable. Most of that growth will be driven by new government contracts, the robust growth of its U.S. commercial business, and the expansion of its generative AI services.

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From 2023 to 2026, analysts expect Palantir’s revenue and earnings per share (EPS) to grow at compound annual growth rates (CAGR) of 23% and 59%, respectively. But at 186 times forward earnings and 33 times next year’s sales, the company’s frothy valuations might limit its upside potential.

Instead of chasing Palantir’s high-flying stock, should investors buy Nvidia (NASDAQ: NVDA) and TSMC (NYSE: TSM) as their long-term AI plays instead?

Nvidia is the linchpin and bellwether of the AI market because it’s the dominant producer of high-end data center GPUs for processing AI tasks. The world’s leading AI companies — including OpenAI, Microsoft, Alphabet‘s Google, and Meta Platforms — all run their AI applications on Nvidia’s GPUs.

The soaring popularity of OpenAI’s ChatGPT and other generative AI applications drove many companies to upgrade their data centers with Nvidia’s GPUs. As a result, the market’s demand quickly outstripped the company’s available supply, its prices and gross margins soared, and revenue skyrocketed. In fiscal 2024 (which ended this January), Nvidia’s revenue soared 126% as its adjusted EPS jumped 288%.

Nvidia faces some long-term challenges. Many of its top customers are developing first-party AI accelerator chips, its rival AMD is ramping up its production of cheaper data center GPUs, and its sales to China are being throttled by tighter export restrictions. Its major customer Super Micro Computer also faces some tough questions amid its delayed 10-K filing, its auditor’s departure, and a potential regulatory probe.

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