AI Superstars Nvidia and Palantir Are Teaming Up. Here's Which Stock I'm Buying Now.

Palantir (NASDAQ: PLTR) and Nvidia (NASDAQ: NVDA) are two of the biggest names in artificial intelligence (AI). Neither company is competing with the other, as Palantir is a software play while Nvidia provides accelerated computing hardware to run AI workloads. The two recently announced a partnership, and this is massive news for both companies.

For Nvidia, it integrated Palantir Ontology into its graphics processing units (GPUs). This integrated technology stack will be far more efficient and unlock new capabilities for Palantir's customers who deploy Nvidia's GPUs.

Time will tell how this impacts both businesses, but I'm only interested in buying one stock in this partnership.

Which one has my eye? Let's find out.

Image source: Getty Images.

Palantir's business will be more sustainable over the long run

Palantir is a software business, and each year its customers must pay the subscription fee to continue running its AI-powered data analytics software. With Palantir's software becoming increasingly more integrated into its clients' operations, this makes the software more and more sticky each year. As a result, Palantir is likely locking in customers for the foreseeable future.

Nvidia's computing business is a bit different. For Nvidia to continue growing, it must continue selling new GPUs each year. Right now, this isn't a problem, as it's releasing a new iteration about every year with performance that makes the previous years' model look obsolete.

Eventually, we'll reach a performance barrier and have the necessary AI computing capacity built out to operate as an AI-integrated society. When that happens, Nvidia's sales will fall as it will only be funding incremental computing capacity buildout and replacing outdated and burnt-out computing units.

This makes Palantir's business far more sustainable over the long run, and I'd rather own it than Nvidia. However, there's one factor that makes me wary of Palantir's future, and it all comes down to stock valuation.

Nvidia's stock price is far more reasonable

While picking a successful company is one thing, ensuring that you pay the right price for it is another. Even the best company bought at the wrong price can turn into a disastrous investment, and that's exactly where I see Palantir's stock right now.

PLTR PE Ratio (Forward 1y) data by YCharts

Despite similar growth rates, Palantir is valued at a far higher premium than Nvidia. With Nvidia trading at about 30 times next year's earnings, it's far more reasonable than Palantir, which is trading at 224 times 2026's earnings.

While I'm OK giving Palantir some premium due to its stickier customer base and rapidly expanding product line, the premium investors must pay to own the stock today is far too great.

For Palantir to return to a reasonable valuation level, let's say 50 times trailing earnings, it would need to sustain incredible growth for a long time. If it can continue growing revenue at a compounded annual growth rate (CAGR) of about 50% (an incredible feat) over the next five years, that would give it annual revenue of $26 billion. At a profit margin of 35% with a 50 times earnings valuation, that would value the stock at $457 billion. Considering Palantir's market cap today is about $450 billion, that doesn't leave room for a lot of growth over the next five years.

Meanwhile, Nvidia is slated to post monster revenue growth as well, with global data center capital expenditures expected to rise from $600 billion in 2025 to $3 trillion to $4 trillion. So, while Palantir is still trying to grow into its premium price tag, Nvidia will be able to convert all of its growing business directly into stock price performance. This makes Nvidia the better stock pick over the next five years, even if Palantir's business continues to excel (and I think it will).

Keithen Drury has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.