A Closer Look at AI Stocks: Nvidia and Palantir Technologies Surge Ahead

This year has been significant for artificial intelligence (AI) stocks, with these companies driving gains in the S&P 500. Investors are eager to enter this space, anticipating that the current $200 billion AI market will exceed $1 trillion by the end of this decade. This expansion presents robust revenue opportunities for both AI service developers and product manufacturers.

Currently, some of these AI leaders are seeing impressive results in earnings and stock performance. Two prominent companies are trading at record highs, with stock prices soaring by triple digits since the beginning of the year. Both have announced strong earnings and provide optimistic long-term forecasts—yet Wall Street suggests that only one stands out as a buy today. Let’s take a deeper dive into these AI frontrunners.

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Nvidia’s Rise in AI

Nvidia (NASDAQ: NVDA) has built a strong AI business over the years, offering top-notch graphics processing units (GPUs) alongside various products and services that aid AI projects. Following this strategy, Nvidia has achieved impressive earnings growth quarter after quarter, and this trend shows no signs of slowing down. Three key factors contribute to this momentum.

First, the booming AI market is expected to keep expanding, presenting consistent revenue growth opportunities for companies within the sector. Second, Nvidia leads the market with its high-performance GPUs, resulting in higher demand for its products than the available supply. Lastly, Nvidia plans to refresh these GPUs annually, ensuring it maintains its competitive edge.

Although Nvidia shares aren’t the cheapest at 50 times forward earnings estimates, the company’s growth potential and a gross margin exceeding 70% make this valuation seem reasonable. While Wall Street analysts expect less than a 4% gain in the next year, the consensus recommendation remains a “buy.” The general outlook indicates Nvidia is worth considering now, as it has promising long-term potential.

Palantir Technologies: Innovations Drive Growth

Palantir Technologies (NYSE: PLTR) has been on the scene for nearly 20 years, traditionally tied to government contracts. Recently, its foray into AI has boosted both overall growth and commercial success. Notably, Palantir reported its highest quarterly profit ever in the latest financial update.

What draws businesses and governments to Palantir? Through AI, Palantir assists clients in organizing their data and maximizing its utility, leading to transformative improvements in efficiency and project execution.

Moreover, Palantir has developed an innovative strategy for launching its Artificial Intelligence Platform (AIP), introduced last year. The company organizes boot camps to transition businesses from initial concepts to practical applications. As a result, Palantir has achieved double-digit revenue growth recently, with commercial revenue now outpacing growth in its government segment. In the latest quarter, U.S. commercial revenue surged by 55%, while government revenue grew by 23%.

Despite this success, Wall Street analysts generally suggest a “hold” rating, forecasting a 32% decline in the stock price over the next year, as shares currently trade at 120 times forward earnings estimates. While Palantir remains bright in the long term, its stock has become expensive and may see cooling off in the near future.

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*Stock Advisor returns as of October 21, 2024

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.