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

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

  • 16.03.2025 18:49
  • fool.com
  • Keywords: No Impact, No Companies

The AI software market is projected to grow significantly, with Palantir Technologies and Microsoft leading. While Palantir shows strong revenue growth, its high valuation makes it less attractive. Microsoft offers a more reasonable valuation for its growth potential, positioning it as the better investment choice after recent stock pullbacks.

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Context

Analysis of Palantir Technologies vs. Microsoft in AI Market

Key Market Insights

  • The global AI software market is projected to grow from $98 billion in 2024 to $391 billion by 2030, reflecting a nearly fourfold increase.

Palantir Technologies Analysis

Financial Performance

  • Revenue growth: 29% year-over-year (YoY) in 2024.
  • Adjusted operating margin: Expanded to 39% from 28% in the prior year.
  • Q4 2024 performance:
    • Revenue growth: 36%
    • Operating margin: 45%

Product Innovation

  • Launched its Artificial Intelligence Platform (AIP), enabling natural language interactions and driving accelerated adoption of data analysis software.

Segmentation

  • Government segment: Dominates revenue but faces risks from potential U.S. military budget cuts.
  • Commercial segment: Showed strong growth with new clients at AIPCon 2024.

Valuation Concerns

  • Stock trades at over 70x 2024 revenue and 55x 2025 projected sales, raising concerns about high valuation.

Microsoft Analysis

AI Leadership

  • Positioned as a leader in AI through Azure cloud computing and Copilot AI assistants.
  • Azure AI services revenue grew 157% YoY in the latest quarter, contributing to 31% cloud segment growth.

Investment in AI Infrastructure

  • Announced $80 billion investment in AI data centers, underscoring commitment to scaling AI capabilities.

Product Portfolio

  • Introduced Copilot for Microsoft 365, Dynamics 365, and GitHub, enhancing enterprise software offerings.
  • Early adoption of Copilot drove revenue growth and margin expansion in the Productivity and Business Processes segment.

Valuation

  • Trades at less than 11x trailing sales, making it more attractive compared to Palantir.
  • Earnings-based valuation: ~29x next-year analyst estimates.

Competitive Dynamics

  • Palantir: Strong growth but high valuation risks. Government segment stability vs. commercial expansion trade-off.
  • Microsoft: Broader market presence, reasonable valuation, and leadership in both cloud AI and enterprise software.

Market Implications

  • The AI market's rapid growth (CAGR of ~30%) positions both companies for significant opportunities.
  • Microsoft's diversified portfolio and lower valuation make it a more attractive investment post-recent sell-off.
  • Palantir's success hinges on commercial expansion and managing geopolitical risks.

Conclusion

Microsoft emerges as the better buy due to its balanced growth, competitive valuation, and leadership in multiple AI segments.