Palantir Soars, But Is It Time to Shift Focus to Nvidia and TSMC?

Palantir‘s (NYSE: PLTR) stock reached an all-time high of $51.13 on November 5. The stock’s impressive 223% increase this year has been propelled by rising revenue, significant profit growth, and its addition to the S&P 500. A surge in AI stocks, predictions of lower interest rates, and a market rally following the elections have further boosted its performance.

Palantir continues to attract investor interest. The company, known for its analytics software that aids government and business clients in data management, anticipates a 26% revenue growth this year—up from 17% in the previous year—while maintaining profitability. This growth will largely stem from new government contracts, a thriving U.S. commercial sector, and advancements in generative AI services.

Image source: Getty Images.

Analysts project that between 2023 and 2026, Palantir’s revenue will grow at a compound annual growth rate (CAGR) of 23%, while its earnings per share (EPS) could increase at a 59% CAGR. However, its current valuation, at 186 times forward earnings and 33 times next year’s sales, raises concerns about potential limitations on future gains.

Comparing Opportunities: Should Investors Consider Nvidia Instead?

Nvidia’s (NASDAQ: NVDA) role in the AI landscape is significant, as it is the leading supplier of high-performance GPUs crucial for AI processing. Key players like OpenAI, Microsoft, Alphabet‘s Google, and Meta Platforms rely on Nvidia’s technology for their AI applications.

As the popularity of OpenAI’s ChatGPT and other generative AI tools surged, many businesses upgraded their data centers with Nvidia GPUs. This spike in demand led to soaring prices, increased gross margins, and impressive revenue growth for the company. In fiscal 2024, which concluded this January, Nvidia reported a 126% revenue increase and a remarkable 288% rise in adjusted EPS.

Despite its successes, Nvidia faces long-term hurdles. Several key clients are developing in-house AI chips, its competitor AMD is increasing production of budget-friendly data center GPUs, and tighter export regulations are limiting sales to China. Additionally, major customer Super Micro Computer is under scrutiny due to a delayed 10-K filing and the departure of its auditor.

Nonetheless, if Nvidia navigates these challenges successfully, analysts forecast revenue and EPS growth of 51% and 56%, respectively, from fiscal 2024 to fiscal 2027 amidst the expanding AI market. With a valuation of 39 times forward earnings and 20 times next year’s sales, Nvidia appears to be a more affordable and faster-growing option for AI investments compared to Palantir.

TSMC: A Steady Alternative in Semiconductor Manufacturing

As the largest and most advanced contract chipmaker globally, TSMC (NYSE: TSM) produces chips for fabless companies like Nvidia, AMD, and Apple, which rely on outsourcing their chip production.

Over the last decade, TSMC has outpaced competitors like Samsung and Intel in the race for smaller, denser chip manufacturing. This advantage has been largely attributed to its early adoption of ASML‘s advanced lithography systems.

From 1997 to 2022, TSMC dramatically reduced its chipmaking nodes from 300 nanometers (nm) to an impressive 3nm, and it plans to begin mass production of 2nm chips next year.

While TSMC encountered a cyclical setback in 2023 due to cooler PC and smartphone markets, it anticipates nearly 30% revenue growth this year fueled by AI-driven orders from major clients. Analysts foresee revenue and EPS growth rates of 25% and 28%, respectively, from 2023 to 2026. Given its attractive valuation of 18 times forward earnings and 8 times next year’s sales, TSMC could serve as a more balanced growth investment compared to Palantir for those focused on the AI sector.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is also on the board. Leo Sun holds positions in ASML, Apple, and Meta Platforms. The Motley Fool has positions in and recommends ASML, AMD, Alphabet, Apple, Intel, Meta Platforms, Microsoft, Nvidia, Palantir Technologies, and TSMC. The Motley Fool recommends various options related to Microsoft and Intel. The Motley Fool has a disclosure policy.

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