Better AI Stock: Nvidia vs. Palantir?

Nvidia (NASDAQ: NVDA) and Palantir (NASDAQ: PLTR) have been two of the best-performing stocks on the market this year, and artificial intelligence is the major reason.

Nvidia needs little introduction at this point. The chip stock has come to dominate the market for data center GPUs (graphics processing units) in the AI boom, which has driven its stock price up roughly 10 times since the start of 2024. Palantir, meanwhile, has emerged as the biggest winner in software from AI as its experience with deep data mining, known as data fusion, has paid off, especially since the launch of its artificial intelligence platform (AIP) last year.

As the chart below shows, both stocks have soared this year.

PLTR data by YCharts

So, which is the better buy today? Let's get into the details on what each stock has to offer.

Image source: Getty Images.

Business model: Nvidia vs. Palantir?

Nvidia has established itself as the leading chip design company, thanks to its prowess in AI and its investments in areas like its CUDA software library, which give it a competitive advantage.

As a result of its wide lead in AI-focused components like the new Blackwell platform, Nvidia currently generates massive profit margins with a generally accepted accounting principles (GAAP) operating margin of 62% in the third quarter.

The company has built an all-star culture focused on innovation, and it seems likely to remain ahead of the competition on AI chips. It depends on foundries like Taiwan Semiconductor Manufacturing Company for manufacturing and is vulnerable to cyclicality and broader concerns about a bubble in AI. The semiconductor industry is notoriously cyclical and prices and inventory levels can change quickly. Therefore, Nvidia's greatest risk is likely a change in industry dynamics that would threaten its growth rather than a competitive threat.

Palantir got its start serving U.S. intelligence agencies after 9/11, helping them connect data points to find threats they otherwise would have missed. Palantir has since expanded its product suite to specialize in a wide range of business needs, including cryptocurrency, data protection, and the prevention of money laundering.

Its principal software platforms include Gotham, Foundry, Apollo, and Artificial Intelligence Platform (AIP). Gotham and Foundry are focused on taking massive amounts of information and making it into a useful dataset.

Apollo is a layer for commercial customers that allows them to run their software in nearly any environment, and AIP works with Gotham and Foundry to use machine learning to accelerate insights.

Palantir has a relatively small number of high-paying customers, meaning it deals in large contracts. The size and complexity of its contracts mean the company faces relatively little competition from other software companies. Instead, it sees the internal software development efforts of its customers as its biggest competitor.

Like Nvidia, Palantir is also at risk of a sectorwide pullback, though its competitive position seems resilient, given the specialized nature of its business.

Financials: Nvidia vs. Palantir?

Both Nvidia and Palantir have delivered impressive results, but one company is clearly growing faster than the other.

Nvidia reported 94% revenue growth in the third quarter to $35.1 billion, with $19.3 billion in net income, up 109% from the year before.

Palantir, on the other hand, reported 30% revenue growth to $726 million with strong results in the U.S. and its commercial segment. Net income jumped 103% to $149.3 million as its margins rapidly scaled up.

Valuation: Nvidia vs. Palantir?

Palantir's explosive growth this year has come largely from multiple expansions. As a result, the stock is trading at a sky-high valuation. Palantir now trades at a price-to-sales ratio of 75 and a price-to-earnings ratio of 411 based on GAAP earnings.

Nvidia stock looks more reasonable. It currently trades at a price-to-sales ratio of 31 and a price-to-earnings ratio of 55.

Which is the better buy?

Both of these companies have a lot to offer investors, especially if demand for AI continues to grow, but looking at both stocks holistically, Nvidia is the better buy.

Palantir's business is certainly intriguing. It's demonstrated its value to customers and seems to have a meaningful competitive advantage. However, its valuation presents a significant risk as the stock could easily plunge if it misses expectations.

Nvidia, on the other hand, also looks poised for similar growth but with less downside risk.