Does Palantir's Latest Partnership With Nvidia Make It a Screaming Buy?

Palantir (NASDAQ: PLTR) and Nvidia (NASDAQ: NVDA) made a big announcement the other day that flew under many investors' radars. Nvidia and Palantir said they formed a partnership to deploy sovereign artificial intelligence (AI) for government agencies.

Why is that a big deal? Well, government agencies can't just plug information into a model like Gemini or ChatGPT as most others can. That's because the information put into these generative AI models is retained by the companies that run them, so sensitive information could be entered that could have national security implications.

Palantir and Nvidia's announcement remedies that situation and clears the way for these two to build the future of AI for government agencies. This is a big deal, but which company benefits most? Let's take a look.

Image source: Getty Images.

Palantir is using Nvidia's base model

Nvidia has an open AI model called Nemotron that is perfect for deploying AI agents. It's an open model, so developers know what's going on in the background and can understand what it's doing. It works perfectly on Nvidia's computing platforms, and having companies use the Nemotron model as a base ensures that its hardware is being used to run AI workloads. When the client is the U.S. government, that's a huge contract to capture.

Palantir will then use Nvidia's Nemotron model to develop tailored software for applications that its clients need. Palantir already has deep relationships in government and industry, making its software a trusted, go-to solution whenever a specific application is needed. This partnership should help boost Palantir's government business, leading to strong revenue growth.

Palantir is a much smaller business than Nvidia, and it generates more than half of its revenue from government sources. Nvidia has a much wider client base, and the AI hyperscalers are some of Nvidia's largest clients. However, AI could become so powerful for the federal government and its agencies that it would need to spend hundreds of billions of dollars on data centers like the AI hyperscalers, which could propel the U.S. government into becoming a large client of Nvidia's.

Palantir stands to benefit the most from this partnership, but Nvidia also has major upside depending on how widespread AI adoption becomes in the government. However, Palantir also needs this growth far more than Nvidia does.

Palantir's stock is expensive

Switching over to looking at the stocks, one is valued higher than the other.

NVDA PE Ratio (Forward) data by YCharts

Palantir has a valuation four times that of Nvidia, and that's despite the two companies having the same growth rate in Q1: 85%. If I were to present an investor with these two stocks, growing at the same rate, yet one is valued four times higher than the other, most investors would choose the cheaper stock, and that's exactly what I think investors should do here.

The AI build-out is far from over, and there is still plenty of room for both Nvidia and Palantir to grow into this generational opportunity. However, if an appropriate long-term valuation for each stock is 25 times forward earnings, that calculation becomes much harder to justify for Palantir's stock.

Palantir must essentially increase its earnings by 350% after this year's growth. That's a lot of growth priced into the stock, and may make future gains difficult. On the flip side, Nvidia is much less richly valued, and any future growth will likely drive the stock higher. With 41% growth expected next year, that leaves a lot of room for upside during the next year.

This is a huge partnership for both companies, and Palantir stands to benefit more than Nvidia, but I still think that Nvidia stock is the better buy overall.

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.