Better Artificial Intelligence (AI) Stock: Nvidia vs. Palantir Technologies

Maybe you've been letting extra cash accumulate in an online savings account that's paid a decent interest rate. Or you stashed an end-of-year bonus to buy some stock when the market pulls back. The S&P 500 surged higher by more than 20% for two consecutive years now, so the thought of getting in at these lofty levels might be nerve-wracking.

But with rates in those savings accounts starting to drop, it may be time to pull the trigger. And you want to be aggressive with this money. You can afford to if you're young, or even just have other buckets with more conservative investments.

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Palantir's surge of greatness

The fast-growing artificial intelligence (AI) sector is where you think this money should go. That makes sense, as it may still be in its infancy stage and has massive potential to transform how companies do business. Like many others, you might think both Nvidia (NASDAQ: NVDA) and Palantir Technologies (NASDAQ: PLTR) have plenty more potential, even after both stocks rocketed higher.

Nvidia captured most of the headlines in the last year or two, but it might surprise investors to find out that Palantir stock outpaced Nvidia's returns by a wide margin. Palantir grew quickly by offering AI software platforms that help manage and secure data for user- and machine-assisted analysis. Its applications expanded from the military to include commercial customers as well. Palantir stock rocketed more than 750% in the last three years.

Of course, Nvidia stock also provided a market-thrashing return of 425% in that time thanks to its AI hardware and software offerings. But Palantir is currently the hot stock, with much of that three-year return coming in just the last 12 months.

That's because the company is quickly growing sales at a time when much focus is on improving efficiencies and problem-solving in U.S. government agencies, law enforcement agencies, financial institutions, and commercial enterprises. All of these are part of Palantir's customer base.

Both companies are growing fast

Palantir and Nvidia are high-growth tech stocks. Yet it's fair to question whether Palantir is growing fast enough to justify its recent stock surge. Sales increased 29% year over year in 2024.

And the rate of growth is increasing, too. Management predicts 2025 revenue will grow 31% versus last year. It's profitable growth as well, with an operating profit margin of 39% for full-year 2024.

But Nvidia is still growing even faster. That's impressive for what is a much larger company. Nvidia's market cap of almost $3.2 trillion compares to $250 billion for Palantir. Nvidia is scheduled to report its fiscal fourth-quarter earnings on Feb. 26. Using management's guidance, though, revenue for the fiscal year ending in late January 2025 will show growth of about 110% year over year.

Stock value reflects Palantir's growth

Maybe more importantly, Nvidia shows sequential quarter-over-quarter revenue growth in the high teens over the last six months. Palantir's quarter-over-quarter sales growth accelerated to 14% in its most recent quarter.

It might continue to accelerate, but by some metrics, Palantir's valuation dwarfs that of Nvidia. Palantir's forward price-to-earnings (P/E) and price-to-sales (P/S) ratios are a mind-boggling 200 and 67, respectively. Compare that to just about 30 and 16, respectively, for Nvidia.

Nvidia's optionality

Nvidia's sales are predicted to continue to grow thanks to its AI-focused chips. The company also created an ecosystem of related software that keeps its AI solutions in high demand. But even if its growth rate slows more than market watchers anticipate, the stock is still a better value than Palantir.

And while Nvidia's data center segment is the focus of its growing sales, servers and compute power aren't the only places where its technology will be used. Nvidia will benefit if self-driving vehicles and robotics become more mainstream. While sales in those areas pale in comparison to data centers, it could be the next growth catalyst for Nvidia.

Data source: Nvidia. Chart by author.

Palantir has great potential as a business and also as a stock investment. And investors with a tolerance for risk and stress may want to invest in the AI software company in stages.

But Nvidia also still has much more potential for growth. It's also trading at a much lower valuation than Palantir. That should lead to better returns in the near- and mid-term. That makes it the better AI stock to buy now.

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Howard Smith has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.